Issue link: https://maltatoday.uberflip.com/i/416739
12 FINANCE Minister Edward Sci- cluna is riding a wave of positive eco- nomic sentiment, at least in the eyes of the European Commission, which has so far accepted the government's forecasts for a diminishing budgetary deficit up until 2016, and with that a gradually declining debt that will go below the 70% of GDP threshold. With his role hived off from the other sectors of the economy, Sci- cluna the economist has been keen to portray himself as the man whose hands control the cash register, and his Budget for 2015 will once again be an exercise in adjusting the Maltese fundamentals: lower spending, lower debt, containing the benefit spend, and improving labour rates. But he also has to contend with the income tax cuts that the Labour gov- ernment signed up for in 2013, which means less revenue from direct taxa- tion but more pressure on Scicluna to finance these tax cuts from other sources of revenue. "The EC has been pushing for re- forms, one of them being shifting taxes away from labour – income tax, national insurance and so on. Malta has the lowest rate of tax on labour and the highest employment growth: I don't think that's a coincidence. We're explaining to the EC that we are shifting tax slightly to consump- tion. But in the last three years, the ratio of income tax to indirect tax has been equal – we're correcting taxes to keep this balance, €1 billion from direct and €1 billion from indirect taxation." Scicluna is targeting a 2.1% deficit in 2014 but spending has been high- er than earlier predicted in April; a shortfall of €74 million in September, after spending exceeded projections by €58 million, and €16 million less in revenue collected. Is there a more realistic deficit to GDP ratio he is tar- geting? "The deficit is based on what is ac- crued, not on a cash basis. In that sense we are on track. On a cash basis you see a shortfall which will be made up for with the excise taxes from En- emalta. They have been collected by the Corporation, which is owed to us. We have no doubt that the Chinese partners in Enemalta will sign the agreement," Scicluna says of a multi- million euro excise on fuel that the corporation has yet to pay, but which appears must be green-lit by its new Chinese shareholders, Shanghai Elec- tric Power. In his report to the EC, the pre- budget plan shows that the sale of passports from the IIP will deliver revenue to the tune of 0.57% of GDP in 2015 – over half the total 1.11% of GDP that will be generated by dis- cretionary measures. The income tax cuts and the lost revenue from the as- set registration scheme will bring the net impact of discretionary revenue measures to 0.7% of GDP. But Sci- cluna refuses the suggestion that in 2015 it is the sale of passports that is bringing in the money. "That is not the case. The IIP was meant as a wealth fund, which many countries have. Even Libya has a wealth fund, despite its chaos, which is now being managed from Malta due to the crisis in the country. "The IIP is meant to contribute to a wealth fund. An authority will man- age this wealth fund, and 30% of the revenues from the IIP will go to the Budget and 70% will go to the wealth fund. Next year, we're going to have a massive injection of €40 million into Air Malta. Can you imagine doing without that money for one year? It's a lot of money. If we have that same amount coming in from the IIP, I certainly wouldn't mind. The impor- tant thing here is the sustainability of the Budget: when the one-offs are no longer there, will the money coming in be enough to finance the Budget?" Scicluna now hopes that reduced spending, and lower deficits, will au- tomatically bring Malta's debt levels under control. "I want to be responsible in that I can contain what I contribute to the public debt – and that means the defi- cit. Every year we add to this stock of debt: if we borrow at a reduced rate, every year, we are already reducing it. "While the previous government contributed to the 2013 debt by in- creasing the deficit by over €80 mil- lion over the previous year, we re- duced that deficit by €60 million. In 2014, we're still adding to that debt but this year's deficit will again be €50-€60 million less than last year, and that means we're adding less to the debt." The government has also come under fire over its failure to cut the public sector workforce by some 500 a year, after it told the EC it would not replace two-thirds of its retiring workforce. NSO data now confirms an increase of 2,108 in public sector employment on a 12-month basis at the end of June; the government even predicted potential savings of around €4.9 million in 2014, which will not be happening this year… "An extra person in the public sec- tor adds to the government's expend- iture, and there's no government I know that would not control the level of public sector jobs. Definitely it's my concern that the public sector does not grow more than the economy grows. That's the limit and the wage bill should contain its share of GDP. "In terms of reforms, we ought to use less labour. Otherwise what's the technology there for? I look forward to every individual using their tablets to fill in their income tax form. "We've had to allow for the political cycles where you see a hump in em- ployment, especially before an elec- tion: normally if there is no change in government you see it before the election, but when there is a change in government you see it on both sides, which is the worst situation. I know political cycles exist but after the elec- tion you start stabilising the public sector to where it should be." But Scicluna denies that job growth is being fuelled by the public sector, and he concedes that the change in government – the political cycle of public sector job growth – has been unkind to Labour. "It's not something that you solve, never. The pressure is always there and it depends on how resolute the government is in resisting that pres- sure. In a democracy, where votes count, we fight that pressure every day: do we need that person, do we need to spend all that money? "It's a government that has been in opposition for 25 years, so the pres- sure is unprecedented. But there are also other pressures coming from health and education. You look at ed- ucation and you see the pupil-teacher ratio in some government schools – isn't there room for some efficiency gains there? Why should Malta have four times the number of teachers per hundred students, compared to Ger- many, for example? We can gain ef- ficiency without reducing the quality of education." I ask Scicluna whether he should be concerned about the fact that under Labour – which set a great deal of store in talking about pre- carity – part-time employment as a primary job has increased by 7% on their watch, which makes it a gen- eral increase over the 2013 average of 5.44% or the 12-month average in May 2014 of 6.2%. And the rate seems to be evenly distributed among both men and women. "I would be worried if I found out that those part-time jobs are taken in the absence of a full-time job. What happens in Malta is that these new jobs are women being pushed by the Budget measures to take up a new job, and they would prefer to take up a part-time job. If that's what's happen- ing I would not be worried, but if they are taking that job in the absence of a full-time job I would be worried. The overall picture is very reassuring. I've seen every sector growing, even man- ufacturing, by some 300 persons; even retail has increased by some 600. "It also shows that we have to im- prove the quality of our statistics," Scicluna says, trailing into yet another controversy about job statistics. "How can we have retail jobs in- creasing while retail sales' volumes are falling month by month? For me, as an economist or a layman, that's an inconsistent result. I think the NSO has to improve the quality of certain surveys…" When a government minister says something like this, people may think that the NSO is not painting the rosy picture the government would like to have…? "Because this minister is an aca- demic," Scicluna replies. "I've taught all the people in the NSO, in econom- ic planning and the tax department. Technically, I get annoyed when I see that the product could be better. As a minister I don't want to interfere in the agency, but I want them to get the best results they can get. I get an- noyed seeing them having to revise a big mistake." So how far has this dissatisfaction informed the decision not to renew the NSO director-general Michael Pace Ross's contract of employment? "Not at all. It's standard practice that all the DGs in all ministries re- apply for 'their' jobs when the three- year contract expires. The previous government did this, to achieve a better performance by putting them on three-year contracts. The MSA informed him a month before and so were Eurostat. Just because I was crit- ical of the agency… I did it in public. People should be worried if I'm silent and pushing from below." So is there any pressure from this government on the NSO? "Yes I put pressure… for high-qual- ity work. I'm not embarrassed about that." Scicluna also appears unperturbed about a recent downgrading of STMi- croelectronics NV by Morgan Stanley over a deceleration in demand. I point out to him that, in Moody's latest re- port, in 2013 manufacturing had con- tributed 13% to the gross value added, compared to its 17% share in 2004. "Are not all branches of industry – finance, manufacturing, gaming – at risk of competition? If there's a les- son to be learnt it's diversification. We can't afford to rely on one sector, branch or firm, no matter how suc- cessful they are. We should ensure that the economy is well diversified." As former chairman of the MCESD, in his time Scicluna coined 'COLA' as the acronym for an inflationary Interview By Matthew Vella maltatoday, SUNDAY, 16 NOVEMBER 2014 Changing a system UNHAPPY WITH NSO DATA As a minister I don't want to interfere in the NSO, but I want them to get the best results they can EFFICIENCY IN PUBLIC SECTOR WORKFORCE Why should Malta have four times the number of teachers per hundred students, compared to Germany, for example?