Cutting our deficit Obama style

Published on the Malta Independent¸ issue 17th April 2011

Can we take a leaf out of Obama’s hymn book and sing our way to deficit reduction. For the uninitiated¸ 2011 was an exceptional year in American history when its deficit rose to more than 10 per cent of the economy. The bitter truth is that similar high deficits occurred during the Civil War and World Wars I and II.

Certainly Malta’s deficit is lower than US but we have not tackled it forcefully since the structural deficit started plaguing our budgets. Does Obama’s assessment of the US malady match our own diagnosis concluding that the patient’s high fever is due to a structural deficit? Over the past two decades we omitted to address it. Just follow the incantations emanating from the Central Bank governor in a recent speech. Malta certainly would need to take the bitter medicine to cure its debt mountain. But is the political class willing and able to implement austerity measures? Not really… we seem to glide along¸ patching the shortfall in state finances by adding more stealth taxes… just stop and consider how Mepa has tripled its charges (but added more than half a million in new salaries¸ and parliamentarians got €4 million in arrears) while other agencies have followed suit. A barrage of fines and interest charges are routinely issued by income tax and VAT departments even to struck-off or dormant companies. Certainly a piecemeal approach but what can you do when there is uncertainty in international markets¸ starting with the Middle East and neighbouring countries that are coping with civil disorder¸ as well as lost production in Japan.

Back to Central Bank governor Michael C. Bonello. He has exhorted the faithful to cut costs and called for a plan to reduce the deficit to achieve a higher level of investment without raising taxes. Naturally¸ recurrent spending must be cut. But how can the minister of finance juggle the figures to trim costs when the unions are asking him to fork out new subsidies for increased prices on fuel¸ gas¸ water and electricity bills. Forum president John Bencini stressed that workers expected compensation because they could not make ends meet. The swift reply from government was that our fuel prices are lower than those charged in Europe. This is true but only marginally; petrol costs €1.44 in the EU compared to €1.38 locally. This is spurious accuracy since our national wages are less than 60 per cent of the European average. Motorists driving on potholed roads complain that the government gets more than €50 million from car licences but spends the miserly sum of €6 million a year to maintain the road infrastructure. The rest goes to meet other exigencies. A dichotomy prevails here as one notes that austerity is dancing with profligacy. Thus private industry is shocked to hear the relative high salary packages granted to top government appointed CEOs but not grant compensation for inflation. One can only cringe that some of CEOs perks are tax-free. All this comes to into play when the sans culottes ask for compensation to meet creeping inflation in everyday life.

This is a paradox given the steady advice from Central Bank exhorting the government to tighten its belt and trim freebies and surplus staffing wherever possible. It is not a cry in the wilderness but the condensed wisdom of a number of illuminati and other academic bigwigs. So why not heed the governor’s golden words and start weeding the garden and trimming the hedges as is the case with Ireland¸ Greece and now Portugal. It is true that these countries have seen their economy shrink over the past three years whereas ours t