Fenech’s middle class budget | Tonio Fenech

Most benefits announced in the Budget - including tax cuts, the increase in children allowance and benefits for parents sending children to private schools - benefited higher income earners. What does this say about the government's social conscience?

Fenech is very frank in admitting the middle class bias of the budget.

"This particular budget addresses the middle class. In previous budgets I have been criticised for not targeting the middle class, which contributes most to wealth creation while carrying most burdens. I took note of this criticism and I have presented a budget which contains a number of measures targeted at the middle class."

But Fenech explains that there is an underlying economic logic in this.

"We wanted to give a push to the middle class, keeping in mind that this is also the category which spends most."

Fenech rebuts the idea that the government has ignored other social classes. "When you raise the minimum rate of the children's allowance, you do not only affect the middle classes but also a wider spectrum, including many families where both parents work and therefore their joint incomes make them ineligible for the higher means tested rate."

He also points out that the €300 benefit for 12,000 elderly people living on their own or with their families is not only applicable to the middle class. So was the decision to give pensioners the full COLA increase, rather than a two-thirds of it, as used to happen in the past.

According to Fenech, while the pre-electoral promise of cutting the highest income tax rate from 35% to 25% for those earning less than €60,000 was aimed at high income earners, the present measure has a more marked impact on the middle classes.

Fenech explains that the objective of reducing the top threshold of income tax was an economic one aimed at promoting economic growth by reducing taxes for businesses.

But in view of the international crisis, the government decided to reach the same economic objective through the micro-investment scheme.

He explains that in times of crisis, businesses respond to tax cuts differently than they do in normal circumstances. In such times, businesses could be more intent on saving for a rainy day, rather than investing. This annuls any economic benefit of a tax cut.

"Therefore, instead of simply throwing €40 million without being sure that this will result in investments, we are reaching the same goal by giving a substantial €25,000 tax credit for the money spent on new investment and employment."

Another "critical key issue" which the budget seeks to address through the creation of a separate tax computation for parents is the low participation of females in the labour market.

Although in the past decade, Malta has increased female participation from just 32% to 40% of the labour force, it still falls short of European levels of female employment.  The government is seeking to redress this problem through fiscal incentives. A tax exemption of a year for mothers who return to active employment has been in place for the past three years.

"In three years, 8,600 women have benefited from this measure, sharing €10 million."

But Fenech recognises that this is a temporary measure, which did not address the extra expenses related to child care and education.

"The idea of the parent computation is to make the advantages of a year without taxes for women who return to work more permanent, in order to ensure that women actually remain in employment."

Fenech makes it a point to stress that this measure is not restricted to married couples, but also benefits separated and divorced parents.

"It also applies to separated parents if the mother takes care of the children and the father pays alimony. If they both work, both will qualify for the new computation."

The government constantly reminds people that we are not living in a bubble and that we cannot escape the hard economic realities which have affected countries like Greece and Italy. 

But in these bleak times, the government is basing all its fiscal projections on a growth rate of 2.3%. Is this a realistic projection?

Fenech justifies this optimism on two grounds - first because the economy itself is creating results through an increase in investments, exports and employment and secondly, thanks to the spin off generated by capital projects.

"Next year we will see a big impact of capital projects which started this year but which were delayed due tendering procedures and permits."

I point out that during this year, the government has actually spent less on EU-funded projects than was approved in the previous budget. Has the government refrained from spending this money simply to reach its deficit targets?

Fenech denies that this is the case, explaining that EU funds are available for the entire operational programme between 2007 and 2013 and can be used till 2015.

According to Fenech, the bigger projects - such as the MCAST campus, the oncology centre, the Qawra Aquarium, the restoration of the fortifications, the bio campus, and the new industrial zones - require a long planning and tendering process which led to delays.

"We would have preferred if work on these started this year and not next year but had we not allocated money for these projects in last year's budget we would have lost the possibility to spend these EU funds." 

Fenech explains that under EU rules, the government has to allocate approximately €150 million (out of the total €850 available over the entire timeframe) each year.

"If I do not allocate this money, the EU will tell me that am not spending the money.  But that does not mean I have to spend that money in that particular year. The important thing is to spend the money within the required timeframe." 

But Fenech is confident that most of these capital projects will be taking place during 2012.

"This will serve as an injection for the economy and will result in job creation."

Both tax cuts and capital projects serve to boost internal demand.

But Fenech warns that investment in capital projects must be sustainable.

"Other countries like Greece overspent on capital projects - such as those related to the Olympics - which were all financed through debt. This led to a situation where they could not afford the debt."

But is it wise to spend €80 million on the City Gate project?

Fenech rebuffs any suggestion that the project has no benefit for the economy.

"We want to attract quality tourism and we cannot do that with an entrance which clearly does not befit one of the most beautiful jewels in Europe."

He also points out that Renzo Piano is an international name, whose buildings are an attraction of their own.

Fenech dismisses the criticism of those who object to the building of a new parliament.

"We are not building the governor's palace. Parliament is a symbol of democracy. People should be proud that we are building a parliament as this represents their sovereignty."

Fenech insists that the whole idea of the creation of special vehicle for this project is based on making the project a sustainable one.

"We will be creating a company listed on the stock exchange to ensure transparency and that it is run along commercial lines rather than a burden."

Fenech reveals that it took two whole years to create this setup because the government was engaged in discussions with the European Commission and Eurostat to ensure that this will not be seen as a way of hiding our debts.

"I assure Joseph Muscat, and everyone else, that the European Union fully knows what we are doing on this issue. This is definitely not a case of creative accounting."

People will be able to invest in this new company and even get a return on their money. Revenue streams like income from projects like MIDI and Viset will be directed towards this company. The building itself will be rented to the government which will pay for the use of parliament and the theatre.

"In this way, over a period of 20 years, the government will finance the project. Previously, we used to finance projects by accumulating debt. This is a more responsible way of financing projects. In this way we are ensuring that the debt is paid within a realistic time frame. This is responsible economic management."

What role did the European commission play in the budget presented last week?

Fenech makes it clear that the measures of the budget were not discussed with the commission, but the projections and forecasts were. EU officials visited Malta two weeks before the budget to review the government's forecasts.

But Fenech is sceptical of current moves in the commission to force governments to discuss budget measures with the commission before these are even presented.

"I have cold feet on this, as I believe in an element of sovereignty just as much as I believe that the commission is entitled to express its disagreement after the measures are presented and to discipline those countries which fall out of established parameters... but I am wary of giving the commission the power to dictate on measures. If this was the case, we would not be allowed to retain COLA as Malta is the only EU country with such a mechanism."

I turn to the other big issue on Fenech's enormous ministerial plate, energy.

In his reply to the budget speech, Opposition leader Joseph Muscat reiterated his commitment to reduce electricity bills. 

Fenech finds Muscat's proposal of a night tariff "ironic" in view of his previous criticism of smart meters as "waste of money".

Fenech shoots down any suggestion of a reduction in the amount which factors Enemalta's capital costs in the bills. This accounts for 8.6% of Enemalta's total expenditure, which goes to finance capital investments and the interests paid on it. This investment includes that made on the new power station and the interconnector.

"If this is not accounted in bills this will either result in an increase in Enemalta's debt, or the government will have to make up for it by increasing taxes. This means that the government would have to spend an extra €12 million. Where will this money come from?"

He also questions Muscat's commitment to switch from HFO to diesel as soon as he is elected, while also promising to decrease the electricity bills.

"This means an extra fuel expense of €30million. And we don't even know whether the price of oil will increase more by that time."

I point out to Fenech that although diesel is more expensive than HFO, the fact that the new Delimara power station is twice as efficient actually means that the cost of producing one unit at the new power station at Delimara by using diesel will still be cheaper than the cost of producing one unit by using HFO in Marsa. This fact has even been acknowledged by Enemalta in a reply to a report by Prof. Edward Mallia. Since the new power station will be initially replacing Marsa, why should the bills increase if we opt for diesel?

Fenech replies by stating that the increase in efficiency in the new power station is the only reason why electricity bills will not be increased in 2012, but this advantage would be cancelled if the country spends more on the type of fuel used.

"If I we lacked the increase in efficiency, Enemalta would have asked the Malta Resources Authority to increase the process of increasing tariffs because we are now buying oil at a higher price than before and has risen to €95.

"Professor Edward Mallia, whom I congratulate for presenting a very good report, assumed that all things will remain equal... but all things are not equal and the price of fuel is increasing."

With regard to Sargas, the private company promising cheap energy through a carbon capture technology, Fenech makes it clear that the government has not dismissed the project and Enemalta is still assessing the proposal.

He is cautious on the promise that the technology will lead to a reduction of the energy bill.

"Whenever I meet someone with a new energy proposal he always starts with the promise of reducing the price of energy."

He also points out while it is true that Sargas have offered to build the plant at their own expense, this is a financing model which would have to be factored in the price paid by the government to buy the energy. 

While describing "the proposal as an interesting one" he also point out that it is a "prototype".  But he makes it clear that he is not averse to prototypes.

He also reminds me, however, that the criticism levelled by the opposition - that the new power station is a prototype - could also be levelled against Sargas.

Fenech points out that although Sargas have a small scale model which proves the scientific workings of this project, there is nothing of the scale Sargas is proposing in Malta elsewhere. 

"What they are proposing is to scale up the model in Malta. As long as there are no risks to people, I have no problem with research and innovation.  We are aware that one has to risk to benefit from innovation... unlike Labour, we do not close our doors by wanting everything to be tried and tested."

One thing which has to be tested is the suitability of a power station floating on a barge in local weather conditions.

"We all remember the storms in our waters during the Bush-Gorbachev summit in 1989... As long as it is proven that this power station does not sink, I have no problem with it... but if there is any risk that this can happen I have a big environmental problem."

Fenech insists that these aspects have to be studies, and that is what Enemalta is doing.

"This is a normal process... but I refrain from announcing that I have the solution as the opposition seems to be doing, before I have a technical report clearly stating that this process is doable, environmentally safe and that reaps the financial results which are being promised."  

He also points out that the government cannot make a direct deal with any particular company.

"Just imagine what would have happened if the government had entered a deal with Sargas without issuing a tender... the opposition would surely have called me corrupt..."

In this case, if the government has a favourable technical opinion on the technology, it will either buy the technology or more probably issue a tender to buy a volume of energy and award it to the company offering the lowest price. 

"If they really can offer energy at just €0.07 per unit, we will definitely take it. But first we have to be sure that it is safe and viable."

Fenech also makes it clear that the government will publish the technical recommendations on Sargas when these are ready.

"The whole model will have to be studied. We are making the workings. Eventually these workings will have to be published."

But he makes it clear that if the process is given the go-ahead it will still have to be submitted to a normal MEPA process and environmental impact assessment procedures applicable to other projects like the Mellieha wind farm and the new power station.

"We have to take the same precautions as those taken on the new Delimara power station. But if it works it is good news for Malta."