This year’s process leading to the presentation of Budget 2008 was undoubtedly one in which citizens were given the opportunity to express their views more than ever before.

The Office of the Prime Minister received about 4,500 reactions by traditional post, phone and email; in an interview with The Malta Independent, Parliamentary Secretary in the Finance Ministry Tonio Fenech expressed his satisfaction that citizens had actively participated in the pre-budget consultation process.

Mr Fenech said people’s reactions, comments and suggestions were very interesting and some were even incorporated in the forthcoming year’s budget.

The most popular issues were pensioners, families with children and education, a sector in which the government will continue investing heavily.

* * *

Interview: Reaping the benefits of financial stability

Budget Day is here and judging by the fact that the country is reaping the benefits of the financial stability it has managed to

create over the past three years or so, people are bound to receive something in return.

In fact, the Parliamentary Secretary in the Finance Ministry, Tonio Fenech

considers sharing economic returns with citizens as an essential part of the government’s approach towards improving the country’s financial stability even further. Interview by Francesca Vella

Election Budget or not, the government is doing what it has to do. Considering citizens as the country’s primary stakeholders, it wants to share economic returns that the country has gained by becoming financially stable over the past three years or so.

However, the government also plans to reduce its deficit to 1.2 per cent of GDP over the coming year, with a view to eliminating it and have a surplus by 2010.

Bearing this in mind, the government is acting cautiously and thinking long-term, according to Mr Fenech, emphasising that the cost of every fiscal measure has to be taken into consideration.

“One cannot speak about a Lm40 million (EUR93.2 million) income tax relief without taking into consideration how such a measure will be funded,” he said, referring to the GRTU’s radical proposal, which he described as a “drastic” proposal.

“The same concept applies for anything else really. You have to consider the impact of such measures in the context of what other fiscal measures are being implemented and the direction you’re taking,” he explained.

People’s reactions to the pre-budget document were very interesting and some of the suggestions received were actually incorporated in Budget 2008, he said, adding that among the most popular issues were children and education - a sector that will continue to receive heavy investment from the government.

Last year’s investment in the education sector amounted to Lm126 million (EUR293.5 million), not to mention other investments throughout the past year, said Mr Fenech, adding that the aim was for the country to excel in areas like the sector of information and communication technology (ICT) and the services sector, including tourism.

It is for this reason that the government has been investing so heavily in the Malta College for Arts, Science and Technology (MCAST) and in the new ICT Faculty at university; the Institute of Tourism Studies has been quite successful, but there’s a lot more to be done, said the parliamentary secretary.

Considering that Budget 2008 is particularly focused on the family, following the last budget which was aimed at securing the country’s finances, Mr Fenech said the government has a plan and naturally, there will be another shift of focus in Budget 2009, although he stopped short of giving any more details in this regard.

What’s sure however, is that the government is planning to eliminate the fiscal deficit and Mr Fenech stressed the importance of acting responsibly, so as not to need to resort to increasing taxation.

In this sense, Malta is now also bound to EU commitments, particularly the stability and growth pact, which finance ministers discussed during Tuesday’s EU’s Economic and Financial Affairs Council (Ecofin) in Luxembourg.

This pact would ensure more transparency, as well as a reduction and eventual elimination of the fiscal deficit, wherever it exists in the EU-27 bloc. Mr Fenech explained that the pact was also intended to “save for rainy days” so to speak.

“What I mean by acting responsibly is that we are not only working towards having a surplus, but also being in a good enough financial situation to be able to invest in the economy and share economic benefits with citizens.”

Considering that the government did not have to increase taxes this year, despite having reduced the deficit by Lm20 million (EUR46.6 million), it is clear that the government is slowly but surely working towards elimination of the country’s fiscal deficit in about three years time. In fact, Mr Fenech referred to this process as a gradual, sound and prudent one.

The country’s fiscal deficit would have reduced from Lm70 million (EUR163.1 million) to Lm50 million (EUR116.5 million) between 2006 and 2007, and down to Lm30 million (EUR70 million) over the forthcoming year.

As regards other aspects like inflation and external deficit, which the government has little direct control over, Mr Fenech said that Malta’s rate of inflation is one of the lowest in the EU.

According to a report issued by the International Monetary Fund (IMF), Malta still faces challenges related to its large external deficit.

Mr Fenech said this depended mostly on foreign direct investment and increasing export levels.

“We have to keep in mind that investors will only come to Malta if they can see that it is a financially stable, competitive environment.

“Last year, the country benefited from about Lm600 million (EUR1.4 billion) in foreign direct investment. During the 22-month Labour government period between 1996 and 1998, the country’s deficit stood at Lm150 million (EUR349 million) and the income from foreign direct investment was just Lm80 million (EUR186 million),” said Mr Fenech.

He said it was therefore extremely important to focus on creating the right financial environment to encourage investors to come to Malta, but also for people to engage in entrepreneurship.

Entrepreneurship is not only a machine for job-creation, but also for further economic growth, export and therefore for an improved external deficit, he said.

While euro adoption should help in this regard, the change may not necessarily be easy, particularly due to perceived, as well as real inflation.

Mr Fenech said that this, together with the increase in the food price index, the social partners on the Malta Council for Economic and Social Development (MCESD), had suggested a better control of the country’s inflation mechanism by providing a slightly higher compensation to make up for this out-of-the-ordinary cost of living increase.

This will be taken into consideration in this year’s budget and the cost of living increase will be that of Lm1.50 (EUR3.49) per week.

As for any possible inflation and price increases due to the euro’s adoption, Mr Fenech pointed out that the government, by means of the National Euro Changeover Committee (NECC), had already signed 11 Price Stability Agreements with importers to avoid changes in price at the beginning of the euro adoption period when uncertainty is most likely to take over.

Asked about the relationship between what the budget had in store for the country and for the people, he said the two aspects percolated at the same pace.

In this sense, since the country was mostly concentrating on the sectors of ICT, financial services and higher-end manufacturing, the highest increases in salaries were registered in these areas.

The parliamentary secretary explained that the government’s approach was aimed at maintaining financial stability, investing in the economy and sharing economic benefits with citizens – balancing all factors in a manner that truly created a financially stable environment.

Nonetheless, it could not be denied that people still felt that the cost of living was on the increase, especially now that the international price of cereals was affecting the price of food.

Tax cuts were registered in last year’s budget, particularly the Lm12 million (EUR28 million) income tax relief. Although he was not in a position to divulge too much information, Mr Fenech did not exclude the possibility that there could be further fiscal relief this year.

Moreover, Budget 2008 also dealt with a review of the children’s allowance. The parliamentary secretary said that till now, parents benefited in the same way, no matter how many children they had, so the system was being revised in order to remove discrimination.

As for the surcharge on utility bills, the parliamentary secretary said: “When and if it is possible, the surcharge will be reduced further. The government is already carrying half the burden, however.

“It is important to remember that should the surcharge be cut by half, as Opposition Leader Alfred Sant has proposed, the Lm25 million (EUR58.2 million) involved to implement such a measure would have to be funded from some form of other tax.”

Similarly, while the government agreed with the principle of removing VAT on vehicle registration, this could not be done immediately, as Labour members of the European Parliament Joseph Muscat and Louis Grech have suggested.

The Labour MEPs have been speaking about reductions in vehicle prices of between Lm250 (EUR582) and Lm1,000 (EUR2,329).

Mr Fenech argued that this was an illusion, since the lost revenue would have to be recovered by means of some other tax.

“They are creating a crusade out of nothing, because it is a matter of shifting the way tax on vehicles is paid. While the government agrees with the removal of VAT on vehicle registration, this would involve a huge reform process, which would have to be carried out over a period of about three years.”

Mr Fenech said the tax would probably be based on the polluter pays principle, so it would be emission based rather than registration based.

He emphasised the fact that when implementing a fiscal measure, it was a matter of reprioritising one’s costs, including the health bill and education bill among others.

“People have come up with a number of very valid proposals and we were also asked to address some very difficult issues such as abuse of the social security system. People are telling us we are too generous in certain areas and not in others. We are taking a number of issues on board, but we want to emphasise that it is not always easy to address every issue at once,” said the parliamentary secretary.