‘Il paese dei balocchi’

During the Xmas break my son was addicted to Walt Disney's Pinocchio, which I had to watch around six times.

One striking image of the tale is that of Pleasure Island (in Italian it translates as 'Il paese dei balocchi') where every day is a holiday and wayward boys are allowed to act as they please without recrimination, until the boys are physically transformed into donkeys.

On Sunday I could not believe my eyes reading the news that according to Finance Minister Tonio Fenech there is no cause of concern over rising deficit.

The reality is that official figures have shown that Malta's deficit increased by €64 million compared with last year.

It is true that while expenditure stops at the turn of the year, government revenue continues to flow in for a further couple of months, thus ensuring a lower deficit.  But this is the same every year and the deficit increase was registered over the same period of last year.

Fenech was the same minister who in December presented a budget which includes a concrete measure to reduce the highest tax rate from 35% to 25% over a three-year period.

In the absence of an abnormal rate of economic growth (which is extremely unlikely given the bleak international scenario), this would simply translate in a drop in revenue and therefore, a greater deficit. This is because there is no way on earth through which one can cut expenditure substantially without cutting expenditure on health or education. One can surely cut down on consultancies but the amount saved won't be enough to balance the books.

The risk is that as government revenue falls, the greater the temptation to introduce means tests that would simply mean that the lower middle class would have to pay for services which were previously free - simply because the upper middle class is paying less taxes.

Politically, the budget has spoiled Gonzi's credentials as the voice of fiscal sobriety, that 'safe pair of hands' which saved the country from the worst ravages of the greatest global crisis since the Great Depression of the 1920s.

One reason for this was the government's reliance on local loans and Malta's inward looking banking system. But fiscal prudence since we joined the euro was also an important factor in keeping the storm away. So was the wise decision not to enact the tax cuts and to spend money in helping factories, which were at risk of closing down. 

Incredibly back then Joseph Muscat was calling on Gonzi to honour his pre-electoral tax pledge, ignoring the fact that Lehman Brothers had just collapsed after March 2008.

But now the same Gonzi who called for prudence and who always insisted that Malta is not immune to international factors, is now giving the impression that we are having it so good that we can even have it better. 

This could ultimately be Gonzi's greatest strategic mistake. For by giving this impression he is lending credence to Joseph Muscat's simplistic promise that under a Labour government, everyone will have more money in his or her pockets.

People will ask: if we are one of the few countries in Europe who can afford tax cuts for the richest categories, why should we not afford cutting utility bills for all and sundry?

Labour has already neutralised the political impact of the budget by endorsing it. But by doing so it has also practically neutered itself and has been put in a position where it is unable to raise doubts on its sustainability.

Moreover, if Labour puts the sustainability of public finances in doubt, voters will also question its commitment to reduce utility bills, especially if this includes a shortfall in government revenue.

My fear is that over the next two months the country will increasingly look like a giant amusement park where politicians will raise expectations beyond what the country will offer. 

The next government will either have to recant its promises, or embark on an even more dangerous path of promoting economic growth at any cost, a short-term approach which could come at very serious environmental and social costs.

For a reality check I recommend switching on to the Italian election, where with the exception of a Berlusconi, nobody is promising tax cuts or lower bills...