Why are we still running scared of reform?

National politics today is dominated by a short-term focus, free-spending habits and security - a trifecta that erodes the compulsion for social and economic reform.

The cliché of our time is that the longest economic expansion the world has ever seen is the result of the economic reforms of the past 20 years. It is true. But if reform unlocks progress, why do political leaders and most other protagonists of the socio-economic arena in Malta run scared of the term?

Our public debate is grievance-centred. Rising prosperity perversely brings in its wake rising public grievance - and political leaders usually manage grievance by resorting to gesture politics not real solutions. This springs from the disintegration of consensus for long-term reform and the fear that reform is too unpopular.

Unemployment is a case study. Prime Minister Fenech Adami once described an 8,000 jobless figure under Labour as a disaster. Now, with unemployment standing at 8,175 (December 2003), and the unemployment rate probably exceeding 5.5 per cent, it is merely a "realistic" state of fact!

It is unsurprising the Nationalist leader should talk like this. But consider the realities. According to the latest NSO survey of changes in Maltese society, females of 18 years or over with a very bad standard of living have, on average, 2.2 children, those with a bad standard of living have an average 2.4 children, while those with a fair standard of living have two children on average.

The same survey reveals that females with no schooling have an average 3.4 children and those with a primary level have 2.3 on average, compared to just 0.8 on average for females with a tertiary education. This must mean that a good proportion of our children are living in households with a fair to low standard of living and where unemployment would be a critical problem for the family.

Moreover, Malta has a poor labour market participation rate (meaning that hidden unemployment is high). The latest NSO labour force survey shows the overall activity rate as being just over 59 per cent in June 2003, but the female activity rate is an abysmal 37.4 per cent. The key to tackling inequality in Malta - by injecting jobs into jobless households - is a connection very rarely made in the incessant but largely futile debate about inequality in this country. The point is that a government in its 14th year has obvious trouble stimulating the reform agenda by suggesting that all is not well. Such concessions are too risky.

We are in dire need of re-invigorating the reform cause by finding a new consensus for change based on recognition that economic and social advances usually go together. I think there are now two major priorities for the nation. First, we need ongoing economic reform and investment in human capital and innovation to sustain our productivity growth. Second, we need to raise labour force participation and get jobs into jobless households.

The Nationalist government's record is equivocal. Dr Fenech Adami is by nature a cautious reformer alert to interest group pacification. He has never been the economic neo-liberal so bizarrely depicted by many of his critics. The reform momentum has been undermined by a complex set of forces that include complacency, breakdown of political agreement, the parliament as guardian of special interests, lack of institutional support for a common "change" agenda, alarm about the fate of losers and the delegitimising idea that economic reform spells the death of Maltese egalitarianism.

The main gulf is between the rich and the rest, and this needs to be addressed. So must the fate of those at the bottom where the issue is poverty not inequality. Finally, more inequality does not constitute an argument against reform but rather the need to rethink and improve the reform process.

In the macro-economy, we had done relatively well since the 1991 recession. At least until recently, we had sustained a good track record of economic growth. However, growth for the past three years has been based mainly upon domestic demand with tourism and exports turning out a lacklustre, if not negative, performance. Unless this imbalance between export growth and growth in domestic demand is corrected, then it will not be possible to keep total growth at the rate of recent years. This is now becoming a big story.

It is a reminder we cannot drop our focus on productivity-raising reforms.

It is true: taxes are now higher than ever, more or less. It is true whether you are looking at taxes alone, or at all charges levied by all levels or agencies of government taken together.

But that does not mean we as a community are necessarily worse off. We keep demanding that governments spend more on our interests. Governments respond by edging up taxes to at least partly meet those demands. The money they spend comes from us, and goes to us.

This is happening virtually all over the world, and has been for decades. What makes the trend extremely worrying for the future is that an aging population will require much higher future spending on health care and aged care. Future governments will have to meet that bill from taxes, because that is where their money comes from.

Shock jocks tell us the government should cut taxes and raise spending. But it cannot do both to any significant extent without pushing the budget further into deficit. Governments have to choose priorities. The fact that governments around the world keep choosing to raise taxes and spending tells us where they believe our priorities lie.

Abstracting from Minister Dalli's figures, the budget projects government taxes this financial year to take an even higher slice of the GDP. Last year, the tax burden crept up to 33.6 per cent: that compares to a tax level of some 22 per cent when the Nationalist Party took office in 1987.

Mind you, this is not just a Maltese trend. OECD statistics show that average tax revenues in member states have risen from 30.5 per cent of GDP in 1975 to 37.4 per cent in 2000. In the EU, the tax take has risen from 27.8 per cent of GDP in 1965 to 42.1 per cent in 1999. The average hides some glaring disparities: Sweden with 52.1 per cent at one end (up from 35.0 per cent), and Turkey with 31.8 per cent (up from 10.6 per cent) at the other end.

Malta remains a low-taxed country. In 1999, out of 29 states on the OECD charts, only three other countries (Mexico, Korea and Japan) had a lower tax take than Malta's figure of 29.7 per cent of GDP, despite that share rising over the years under successive governments.

Second, Malta still taxes consumer spending relatively lightly. The typical VAT in Europe in 2001 was 19.4 per cent versus 15 per cent here. Of the 29 OECD countries with a VAT or general sales tax, 13 have standard rates between 20 and 25 per cent; the median rate is 19 per cent. Malta could afford a lot of things - lower income tax and more services - if consumer spending were taxed like that here.

Some economists argue that high taxes are a deterrent to foreign investment. While high-tax European countries compete for investment with each other, Malta is competing with developed East Asian economies where taxes and spending are lower still. Nonetheless, to be a low-tax country prevents any government meeting the kind of expectations that are voiced by frustrated interest groups.

Real reforms are possible. They only require real leaders.