30 August - 5 September 2001

Cutting public expenditure

John E. Sullivan, President of the Malta Chamber of Commerce, talks to Blanche Gatt about the business community’s concerns over government expenditure

The recent release of a joint statement by the Malta Chamber of Commerce, together with the FOI, MEA, MHRA and GRTU, highlighted fears that are growing ever more widespread among the Maltese business community.
“We issued the statement,” explained John Sullivan, President of the Malta Chamber of Commerce, “in reaction to official statements that Malta had collected more money in taxes, but continued to increase expenditure. We feel that unless something concrete is done to diminish expenditure, we will be facing a difficult situation. We also feel that the private sector cannot bear the burden of additional taxes at this point in time, and it is essential that government takes note of the advice offered by the IMF in their recent report, that the solution lies not in raising taxes, but in controlling expenditure.”
Concerns about the prevailing economic situation have been growing over the last months. In May 2001 the Chamber of Commerce carried out a survey among all trade section chairmen in order to document current perceptions on business in each particular sector. The replies received showed clearly that a slowdown in business activity was experienced in all sectors, with reported profitability either below or unchanged from the year before. Adverse cash flow conditions and market fragmentation, as well as low inward investment were identified as critical factors affecting the development of various industries.
Today, numerous businesses complain of lower profits and stagnant business, but there are those who believe the country is in a far more critical position than official statements would have us believe. “The national debt situation has long been termed as unsustainable and one which requires hard and timely decisions,” John said. “According to the latest figures, pertinent to last July, Gross Government Debt edged at Lm993.8m. When expressed as a percentage of the annual GDP figure recorded last year, the January-December 2000 figure for Gross Government Debt stood at 63.9 per cent. However, one must bear in mind that these are interim figures for the first seven months of the year. We have read in the press last week that government intends to privatise three State-owned companies before the close of the year. This measure will inevitably serve to ameliorate matters.”
“Nevertheless,” he continued, “the Chamber follows the public finances situation with utmost attention because its potential macroeconomic consequences are numerous and concerning. Implications on taxation, the interest rate, inflation, foreign reserves and currency stability, among others, must not be overlooked because they affect, in turn, aggregate demand, consumption patterns and, ultimately, commercial activity.”
Complaints made by members of the Chamber of Commerce centre around the core of any commercial enterprise: profitability. John explains that various factors have led to lower profits being registered by Maltese companies. “My personal view is that there are a number of reasons for this downturn in profitability,” John said. “First is the question of competition – after years of institutionalised protection, companies are having to cope with liberalisation. And despite the fact that this was introduced years ago,
and accepted by the business
community, we still have not dealt with it adequately.
“So while competition means many more retail outlets for example, there have not been a corresponding increase in population, so clearly some are going to feel the pinch. Then there’s the taxation problem – for years we had an inefficient tax collection system which has now been, quite rightly, tightened up considerably. However, now those years are catching up with businesses, and they are having to pay what they owed to the tax authorities. The third important factor is the financial institutions, who used to be quite liberal and are now far more cautious.”
The problem of shaky government finances adds to businessmen’s concerns over the future. “Of course,” he added, “the problem will also hit them if government spending on projects and other areas fails to pick up due to lack of funds. It will hit them indirectly if as a result of increased taxation and tightening of efficiency in tax collection, there is a decline in consumer spending which will obviously hit the commercial community at large encompassing retailers, who will feel the brunt first – but also service providers across the board, importers and manufacturers.”
Three areas of government spending stand out like sore thumbs from the rest; these include welfare payments, the public sector wage bill and interest payment on government loans. Reducing expenditure in these three areas is a long-cited ambition, but one that has never yet been achieved. What solutions does the Chamber of Commerce suggest for these three issues?
“The Chamber has no hard and fast position on all these three issue,” John replied. “However, we do believe that our country suffers from a misallocation of resources due to the relatively high government participation rate in the economy. The country’s most important resource is its human one. Malta’s public sector is largely over-manned in many sectors and hence accounts for a vast proportion of our labour force, which is working under ‘less than efficient conditions’. If released to more productive use in the private sector, the input of this section of the workforce would invariably enhance their contribution to strengthening Malta’s competitiveness. In the process, this measure would relieve the tax payer from a considerable burden imposed by the public sector wage bill.”
“By this,” he clarified, “I do not want to give the impression that the only solution is sacking people – on the contrary. Solutions like the Private Public Partnership that were proposed a year ago could go a long way towards resolving some of the problems, and utilise resources that today are lying idle.”
“With regards to welfare costs,” he continued, “the Chamber believes government should con-tinue to monitor and control all benefit payments granted under the Social Security Act which are still notoriously liable to wastage and abuse. In this regard, the Chamber fully supports the aims and work performed by the Benefit Fraud Unit. As to reduction on loans, the only way to reduce them is through curtailment in government expenditure and through further privatisation. For several years the Chamber has solicited privatisation, not
strictly as means to solve the National Debt Problem, but
it cannot be denied that while offering numerous other benefits,
privatisation would help in no small manner to diminish the continuing national debt problem.”
One of the major concerns of the Chamber of Commerce is that government will attempt to fill the country’s coffers through added taxation. “We believe government may resort to increased taxation based on a government statement found on page 8 of the Consolidated Acc-ounts Structure (1999) that says: ‘If notwithstanding these efforts these targets are not met then we shall resort to sustainable taxation to make up for the imbalance’, referring to the targets set out for public finances consolidation in 1998.”
The added burden of new or increased taxes is not one relished by any of us, and in particular the business community who claim to be already feeling a downturn in their fortunes.“You can appreciate that taxes are an overhead cost,” said John. “Costs can either be passed on to the consumer or absorbed by the profitability of the company.
“Given the present situation of over saturation and intense competition in many sectors, it would be foolish for a firm to attempt to pass unjustifiable costs to the consumer as the latter will immediately respond by changing supplier or not buying at all. In the absence of profitability, investment will decline – both from existing and new companies. This is obviously detrimental to the economy due to the multiplier effect of investment on the rest of the economy particularly through employment.”
John Sullivan believes that Malta should look to other countries for examples of how to solve its economic problems. Discarding employees in the public sector to cut down on government spending is not a viable solution, but reducing expenditure by increasing productivity is, he says.

“The time has come for the three social partners to get together to find a solution. This is what we would like to achieve on the MCESD, to get together and come up with a modus vivendi. It is not easy, but it has been done in Ireland, for example, where since they took this step 10 years ago, their economy has flourished incredibly.”
Malta’s national debt, at around Lm1,000m, has never been so high before. And with government borrowing at the rate of Lm10m per month, unless drastic action is taken, the burden of interest payments, coupled with the massive public sector bill and the ever-increasing welfare benefit costs, could create an untenable situation.
“Our primary qualm with government’s handling of the financial situation is its inability to responsibly contain public expenditure. Government cannot be solely blamed for this predicament as this is an issue which falls within the remit of the MCESD, but it must also be emphasised that apart from containing the national debt, government’s prime objective should also focus on encouraging a business-friendly environment. After all it is private enterprise not public expenditure which leads the way to long-term sustainable prosperity.
“The objectives for the consolidation of public finances as expressed in the Consolidated Accounts Structure publication rest on clear GDP growth assumptions. The private sector must be assisted in creating the level of national wealth required not merely for the attainment of public finance targets, but also for considerations of employment, investment, balance of payments and standards of living.”
The Chamber of Commerce is organising a conference with the theme “National Competitiveness – The way to Prosperity” on Friday 5 October at the New Dolmen Hotel, Qawra. Further details will be announced closer to the date.