Budget 2017 – Scicluna gambles on being Malta’s Gulliver

Author: George Mangion
Published on Malta Today 22 September 2016

The Convention on the Manipulation of Sports Competitions would be a heavy blow to Malta’s industry since gaming companies here take bets from punters in a wide variety of countries. Edward Scicluna, the finance minister, gave a two-hour impromptu talk at the Excelsior hotel at a Pre- Budget 2017 event where the public was invited to fire questions at him on various topics relating to recommendations to be considered at the next budget.

His mastery of the subject was amply manifested by his off the cuff replies and the casual way he simplified complex issues such as sustainability of pensions, the tax imputation system, environmental protection, lower taxes on hybrid vehicles, Brexit aftermath and a myriad of other topics thrown in by the audience for good measure.

It is a feather in his cap that four international credit agencies have given the thumbs up for the economy. He humbly explained how such a positive achievement wasn’t easy having started his administration with a threat by the Commission to impose Excessive Deficit Mechanism as the deficit towards the end of 2012 reached 3.7%. He is certainly not the sort of man who does things by halves. Three years ago he was faced with a pre-election promise to cut personal tax on managers’ salaries from 35% to 25% – this is now history.

A member of the public asked his opinion on the scaremongering coming from certain quarters that our fiscal regime is on the ropes. He replied that some members in Brussels might be envious of our success in certain sectors, such as remote gaming. The latest hot issue centres on a new definition of ‘illegal sports betting’ being pushed forward by the Council of Europe in its Convention on the Manipulation of Sports Competitions.

At the Pre-Budget talk, Scicluna said he is opposing this definition that renders unwieldy the operation of licensed operators in Malta, and is standing his ground to protect our coveted online gaming sector in the face of pressure from the rest of the European Union. Gaming today accounts for 11 per cent of the country’s gross domestic product.

Therefore the Convention on the Manipulation of Sports Competitions, in its current form, would deal a heavy blow to Malta’s buoyant online gaming industry. Especially since the vast majority of Maltese-registered online gaming companies take bets from punters in a wide variety of countries. Sounding like a latter day Gulliver in the country of Lilliput, Scicluna declared he will fight tooth and nail at the Council of ministers even using the veto if he has to, and certainly will not succumb to pressure to kill this industry.

He then explained how at the ministry of finance he inherited a limping Enemalta, the national energy utility crippled with debt, which wasn’t even able to pay old Delimara debt let alone raise millions for new investment. After the reforms in the energy sector, which will run on more eco-friendly gas thanks to a new private investment, the figures now speak for themselves. Another smart move was to cut the deficit below 60% of GDP. This was not due to any windfall – we did not strike oil (not as yet anyway) – but due to sheer hard work.

With 1.8 million visitors, the success in the tourist industry is now evident, and the imposition of a bed tax capped at €5 per visitor has been welcomed by hoteliers. There are no golden surpluses; no bonanzas; no manna from heaven, but nevertheless the economy is on the mend – credit rating agencies refer to it as stable. And while there have been a number of pats on our backs, we cannot become complacent if we are to sustain our rate of growth, especially as competitor countries are all in the same race.

A 5% to 6% of GDP growth looks great on paper, but even so a parsimonious approach is prescribed to reduce past deficits. There will be no Father Christmas to splurge on golden gifts. Days of past profligacy are numbered and in the drive to aim for a budget surplus – every penny counts. We are not in the mood to tax, spend and borrow.

In fairness to Prof. Scicluna, it has to be said that he did not set out to snatch his predecessor’s (now in Opposition) reputation for budget deficits and uncontrollable government spending. For the first three years of his term, the finance minister seemed genuinely committed to reducing government spending and cutting taxes — too much so for his political opponents.

For a start, all budget projections can be notoriously unreliable, including short-term ones. Nothing is cast in stone. Even after the Brexit vote last June and the severe devaluation in value of the Pound, the projected drop in arrival of British tourists did not materialize.

The assumptions about growth made by last year’s budget have met their targets as they were realistic – albeit a 6.3% of GDP growth was stellar – but next year may see a more subdued rate of growth. It is assumed that Malta will grow by around only 4% next year, in line with many forecasts; but everyone hopes growth in the Eurozone will improve once the full effect of lower oil prices will percolate through the system.

Despite this, Scicluna has thrown himself enthusiastically behind the shift in budgetary emphasis to fight poverty and social inequality. No sympathy for Keynesian largesse. At the same time, he remains as committed as ever to his tax-cutting strategy and to continue to improve the welfare safety net for those in need. In a video posted on MaltaToday, he remarked: “The first risk is that expectations start increasing: people demand they take a share from the growing wealth they see around them. The problem is how income will be redistributed, and how to face poverty and equality.”

On top of this, Scicluna (aka Gulliver) spoke freely on the sensitive topic of poverty explaining that it can be of two types – absolute and relative. His budget is expected to fight absolute poverty by a number of new measures, but he admitted that relinquishing relative poverty altogether could be illusive. Typically, relative poverty can be the result of new affluence that inherently creates two classes – the haves and have-nots. This may be explained by an example.

Development of more luxury dwellings will automatically improve the standard of living, but also pushes up the price of housing (especially alongside lower quality social housing which looks disadvantaged by comparison). This may set in a secondary fear of a property bubble unless supply is matched with adequate demand from high spenders (mostly foreigners) who can afford to buy or rent luxury high-rise condominiums. Joe Farrugia, director-general of the Malta Employers Association, also referred to the widening income gap in the context of luxury accommodation recently. “Rental costs are increasing due to higher demand by foreign workers… eroding the disposable income of persons and families who do not own their own homes,” he argued.

Scicluna disagrees however. In the same video he calms the waters by saying: “A lack of housing can influence a rise in property prices. But objectively, it is a sign of higher demand and lower supply: it pays for people to build more and sell. There is nothing wrong with prices rising. Of course, there are those who will be affected negatively… as prices rise, the market will correct itself.”

After being released from the ropes that were holding him prisoner in the famous story by Jonathan Swift, Gulliver proceeded to help the natives to secure defences against their enemies. In philosophical mood, Scicluna advises us to be contrite and continue to be vigilant even though the harvest is rich. We cannot rest on our laurels, he says. The effort that got us to the top in the first place cannot render us complacent. He warns us that when we are comfortable, it’s not enough to simply wake up and let the others do the heavy lifting. Alas, his words are wisdom to the cherished citizens of an isle of milk and honey.


Author: George Mangion
Published on Malta Today 22 September 2016
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