Issue link: https://maltatoday.uberflip.com/i/187071
12 Interview maltatoday, SUNDAY, 6 OCTOBER 2013 By Matthew Vella His hands on the THE new finance ministry is cut out for Prof. Edward Scicluna. The economist seems unencumbered with the kind of nasty political swashbuckling that the larger finance and economic affairs ministry of the past 30 years had to endure. Complaints about privatisation projects, sale of government land, tendering procedures. All controversial privatisation and economic affairs are left to other ministers like Chris Cardona and Edward Zammit Lewis. All that seems left for Scicluna, an economist at heart whose political hat was only donned recently when Labour pushed him to become MEP, is to keep tabs on what government departments are spending and raking in. Still, this is not without its own struggle. For example, Scicluna has to battle against forecasts that Malta's GDP, already within the European Commission's corrective 'excessive deficit procedure', come down to below 3% GDP when forecasts from the European Commission, the IMF, and credit rating agencies claim the budget will blow up to 3.6%. But Scicluna seems at ease, because as he soon explains, he is to keep his hand firmly on the till to make sure that the slippage last incurred in 2012 (a percentage point) does not get worse. PRIORITIES "Rather than asking myself, 'why did the EC say that?', I am more concerned about my estimates and whether I will meet them" In a nutshell, we're keeping things as they are to stay under the 3% mark. "Surely the EC's, IMF's and the rating agencies' forecasts have to be taken seriously. But they are underestimating our resolve to keep the deficit we estimated last April – a revised figure from last November's budget – as it stands. From my end, it looks simple enough, even though it is not simple in reality." The original plan back in November was of arriving at a budget deficit of 1.7% for 2013. For 2012 it was 2.3%, and the previous administration was aiming at cutting 0.6 points and bringing it down to 1.7%. There was a one percent slippage in 2012, and from 2.3% the deficit ran up to 3.3%. "The slippage was mostly on the revenue side, with a highly optimistic projection that did not materialise," in part, Scicluna says, due to uncertainty within the suffering construction industry, that led to a further decrease in revenues. "My job was to look at the 2013 budget in March when we were elected. I too felt that it had been over-optimistic. There were some losses in the first three months and some expenditure commitments before the election. But I calculated that the 1% slippage would continue for this year – so I simply added one point on the 1.7%, and that makes it 2.7%. I said it would not be easy, but with a lot of effort we will make it. The Commission and the IMF were sceptical about us keeping spending and revenues where they were, and that is why they forecast a higher deficit." As Scicluna says, his job seems to be focused entirely on keeping matters as they are – a hawkish minister unencumbered with little else but to keep spending and revenues sound. "Rather than asking myself, 'why did the EC say that?', I am more concerned about my estimates and whether I will meet them. I'm making sure the estimated revenues do come, and that I don't allow – and this is the hardest part – any higher expenditure more than has already been estimated by the ministries," Scicluna says, who at the time of our interview has only finished meeting with the heads of all government departments to survey the cash flow situation. "I get a blow-by-blow account of what's happening. I can't lose track of this even for a week," he says, running his fingers through a ream of papers with the latest figures. "Until August, we are down €0.6 million on the revenue side, which is nothing from a total revenue of €2 billion. On the spending side, we have underspent by €2 million. As long as I am in charge of the cash register, I can see that we are ok on spending and on revenue," he says, aptly outlining his job description. But staying under the 3% threshold also requires proper deficit-reduction measures. If he is not selling off the family silver, as he recently quipped over Nationalist privatisation, where have the cuts in the "inefficiencies" taken place? "There have been cuts, cuts which took place without any fanfares. We reviewed areas where we felt there were inefficiencies and I estimated around €20 million in spending has been reducing, affecting some 195 line items. We instructed people that they would not be spending more than their allocated budget. And sometimes you hit a live wire and they come complaining here, telling us how 'we've hurt them'. It wasn't easy but we managed. "Then there is the spending that is considered to be normal pressures, which are then reflected on a supplementary budget, where overspending takes place. But we have kept spending down by bluntly saying no." On the taxation side, Scicluna says the government's next challenge is to improve its tax collection efforts by improving its own IT systems to keep track of what is owed to the state, even though, as he puts it, he is not a keen 'moralist' on tax collection. When I point out that over €1 billion in unpaid taxes, arrears, fines and penalties remain uncollected (a good chunk of which gets written off throughout the years), Scicluna says that he makes a difference between people who are unable to make ends meet and postponing payments, and those who are actually evading tax. "I don't mind picturing them [the latter] as parasites: people who want to ride without paying. But when in government, I don't like that kind of morality. I ask myself: is a person getting away with it? Who is making it easy for him? I'd blame myself. It's our computer systems that should be in place for this kind of thing, and we're still not there yet. I only learnt that the Joint Office [which manages lands passed from the Church into the hands of the State] have an IT system in place to keep track of arrears it is owed." So how wise would the tax cuts be in this current state of affairs? In November the Nationalist government promised a gradual, three-year tax cut from the top tier brackets of €59,000 incomes downwards, from 35% to 25%. Labour had no choice but to take on these tax cuts, a political manoeuvre designed at taking on the budget lock stock and barrel when it was clear that the imploding Gonzi administration would be unable to carry it through. Scicluna seems at ease. "There is no shortfall. The way we see it, it's a shift from direct to indirect taxation," he says, giving off the impression that income retained will find its way into government coffers through VAT receipts from increased private consumption spending. "Malta will continue to receive the same revenue from taxation. It's definitely a shift from direct to indirect tax, and we are seeing it the same way as the previous administration did. For each three percentage points of tax cut, we estimate the loss of revenue to be €11-€12 million – so in total we're looking at a total burden of anything less than €40 million. And this will be done gradually, and not an expansionary budget in which tax is simply being cut. We are incentivising higher, and middle to middle- higher taxpayers, who are the bulk of taxpayers, and giving them less of a burden. "I think more is being made of it than is actually involved. The great concern will be income distribution and poverty, and what we must not do is skew income distribution, especially since over the last four years, poverty in Malta has increased." Formerly a critic of the improperlyspent EU funds under the Nationalist administration, Scicluna says the government's programme for economic growth will include making the most of EU funds through an ambitious capital expenditure programme. "It's a Dr-Jekyll-and-Mr-Hyde situation: I'd like to see a 3% growth, and that's what our programme is actually geared for, 2-3% and eventually 4% growth. But we cannot expect miracles. So on the other hand, with my finance minister's hat of prudence, I'm trying to forecast a picture of less exuberance. Because if growth does not materialise, we don't want to end up in another excessive deficit procedure. "The growth forecast of 1.7% has to be taken as is. I don't say it with pleasure, and it's even more pessimistic than the IMF's or the EC's, restricting my revenue forecasts and even spending projections. So what I did was to ask the Auditor General – in the absence of a fiscal council that oversees the budgetary process, which we will do in the coming year – to commission an expert's report into the growth model, and see whether the forecast was realistic. The report will be published soon, and this model will ensure nobody fiddles with the rate of economic growth as was done in the past." Scicluna says he hopes the government will be seeing new revenues in the form of foreign influxes through the global residence scheme, a property scheme aimed at tax exiles mainly, and through the diversification of the economy. He mentions as an example the maritime projects earmarked for the former shipbuilding area, or land reclamation. "Malta cannot have one sector that is always growing – and of course, we would not stop it from growing – because it creates a risk. Whether they be the banks or financial institutions [which in total are eight times the size of the Maltese GDP, both core domestic and international banks] or ST Microelectronics… if you don't diversify they become giants and systemic risks." I ask him whether it makes sense to promote land reclamation projects for a construction industry that is already underperforming, has a dormant over-supply of housing, and is responsible for the largest percentage of corporate non-performing loans with Maltese banks. "It's not my job to go into that," Scicluna says, pointing out the limits of his ministry. Wouldn't it be unwise to give a dampened industry like construction a new playground to play in, giving the current state of affairs? "That's a risk for the banks, and the warning that banks are being given PARASITES "I don't mind picturing [tax evaders] as parasites. But then I ask myself: is a person getting away with it? Who is making it easy for him? I'd blame myself" is to be strongly capitalised. It's not that credit should not be given to construction, but banks that should be well capitalized for this credit, and it's up to banks to find their gearing ratio when it comes to this credit." The impression is that the government will be giving out land to keep the construction industry happy, at the cost of creating further unused stock. "Financial stability depends on banks being sound. It's up to the Central Bank and the MFSA to see that institutions are well capitalized for this kind of credit. Let's say foreign investors go for it… the financing would be coming in from outside, so the financial problem is no longer on the desk." But surely as finance minister, he believes in discouraging land hoarding…