The solution is good governance | Edward Scicluna

As we sit in his office in Naxxar, Edward Scicluna, an economist, academic and politician, says: "In 1996, Labour had an opportunity to show that it could be a modern, business friendly and middle of the road party. However the party missed this opportunity because of historical reasons."

However, Scicluna believes a new Labour government will show that business creates growth. "Now it is getting clearer and clearer that centre-left parties can talk business. It's a question of mentality and even business people are realising that fairness in taxation and equity is not an enemy. They now realise that workers have to be happy and workers too understand the need of healthy businesses. We can manage what Tony Blair did in the UK and build an economy that is friendly with the modern worker and equitable. I personally wish a future Labour government that can show this."

Asked what his first decision would be if is appointed Finance Minister, Scicluna said the appointment would be the prerogative of the future prime minister, however he said a new finance minister should "bare all". He said a new minister should "bare all in a forward looking fashion and show how things will be done. He should say from now onwards we will have good governance and transparency. A new government should be open to the media and show the people that it will walk together".

Scicluna said the Standard and Poor's downgrade Malta suffered this month is "disappointing and unwelcome". However he says the question is how to interpret the ratings. "I have just been at a hearing in the European Parliament. We are very concerned by rating agencies not only because they are solely American and there always is a suspicion about their motives. But their practices and ownership need regulation. They fell foul of their profession before the recession. They were rating junk bonds AAA because it was boom time any they went along with the party. Now everybody has learnt the lesson and they are now overreacting. Their overreaction has to be separated from the lack of regulation. After all, the agencies have professional people who do their homework well. What we should ask is why not all of our partners were downgraded. Why was Estonia left off? In reality our debt has not stopped rising and we have not done enough."

In reaction to the recent IMF summary report on Malta, Scicluna said the report raises a small question mark in regards to the property market. "If there is a risk for banks in Malta it is the loans to the construction industry. There was a higher than average concentration on the property market and neither the banks nor government did anything to stop it. We have not had the same problems Spain and the US had but the report says 'loan quality has deteriorated and the number of restructured loans has increased'. For instance, Greece is asking the eurozone for restructured loans. These are loans that cannot be paid back. If these loans are not restructured they would go bad. These might result in loan losses, depending on the property prices. Maltese investments are holding and can wait longer than other countries but who knows for how long they can hold?"

As for the economic situation in Malta, Scicluna believes the problem is not the economic results but government's boasts. "The current administration has been boasting and using a number of superlatives. For instance, government says Malta is the only country which has not been hit by the recession. It also boasts that Malta has the lowest unemployment rate, the highest exports together with Germany and achieved a record in tourism."

"When you have a close look at things, things are different. For example, tourism is measured with bed nights not with the number of tourists. Compared to 2010 we have had the slowest growth rate. In terms of unemployment, Malta has a low employment rate. This is the number of people in work out of the population between the age of 16 and 64. The production function of the country is the lowest in the EU after Hungary. When comparing ourselves with troubled countries such as Greece, Italy, Spain, Portugal and Ireland, in spite of their problems they still have more productive people supporting the population. We should see our target growth in this regards. These are the kind of targets we should have."

With regards to exports, Scicluna says that government should be more credible. "Normally exports are measured by manufactured goods and services, including the financial services sector and tourism. We have some services, for instance oil bunkering services which bring enormous volumes of oil, which is then re-exported. It is good business for Malta as we earn money but if you bring this in and do not include exports and imports of oil in the same month you'll find that Malta is exporting 40% more then last year. This is not serious. You do not expect a Prime Minister of a European country boasting with data, which is silly."

"Every politician tries to impress the country, especially when election comes, but there are limits."

Scicluna also lambasted government over the so-called imposed austerity measures by the EU Commission, who has asked government to cut €40 million from its expenditure in 2012. "Government refuses to call them austerity measures. It refuses to call things by name. The tax payer would like to know where the cuts will be made. A new Labour government will change this culture. We will call a spade a spade and be transparent. If required, we will set an example and expect the people to follow suit. We will talk to the people and be truthful."

"Arrogance raises its head in bad moments. When announcing the 2012 Budget, the finance minister saw the signs on the wall. I saw it, the Opposition saw it. But the minister did not want to see and thought he could get away. Had he listened to the advice, the minister could have tweaked the budget in November, and we would not be where we are now."

On the delicate issue of pensions, Scicluna said this will be one of most important challenge in the near future. "The IMF described it as a daunting challenge. It depends on our departure point. The IMF described the situation as daunting, because we have fallen back in education, pensions, energy and competitiveness which now become the main challenges ahead."

Pressed to explain his position on pensions, Scicluna said Malta had undergone a reform in pensions years ago, but that the second phase never kicked off. "We have not done anything on the second pillar. The IMF and the EU are now forcing us to act. I am against the introduction of the second pillar right now. In the future I would like to see the introduction of occupational funded pensions, but today it is not the only solution."

"A threat as big as the lack of a second pension is national debt, because both are a burden on future generations. I discussed this with the IMF and I believe that if debt is diminished, the burden on future generations will be eased and this will help pensions. If future generations are left with less debt to pay, governments will have more money for pensions. Yet, at present the country cannot take the burden to introduce a second pillar whilst trying to reduce debt."

Asked how national debt can only be reduced, Scicluna was quick to answer "by good governance". He said bad governance costs money and a lack of good governance has landed Greece, Italy and other countries in trouble. "On the revenue side you must ensure to maximise what you are due by law. How many qualified accountants are currently employed at the inland revenue department?"

"Both revenue and expenditure need good governance. The public sector cannot work properly with a lack of meritocracy. This affects the productivity of the public sector in a country with scarce resources. Good governance is bigger than one would think."

Scicluna said tax evasion can only be defeated by strengthening the administration. "Tax evasion is one of the main challenges for a new government. Tax should not be looked at as a thief. But on the other hand you should not have exorbitant penalties and interest rates. These measures should be in place but they must be proportional to the crime. If somebody makes a mistake in good faith it should be penalised in the same manner as a traffic contravention. It is outrageous that a €50 fine becomes a €3,000 fine in three months. Tax administration must be reasonable and tax collection must be more efficient."

Asked to explain Labour's proposals on taxation, he said this must be progressive. "Who can pay more should pay more and not the other way round. We must answer why in the last seven years more families have fallen below the poverty line. This started before the recession. We also had an increase of the working poor. It is the lower end of society which must be addressed. In Malta there is consensus on a 35% rate of taxation and there are no plans to increase it. However we have tools to ensure progressive taxation. Why should somebody on social security and willing to be in work be penalised by paying a 45 or 50% effective rate in marginal tax due to the loss of all contributions?"

In December the Nationalist and Labour parties stood together in their opposition to the introduction of a Financial Transaction Tax (FTT). With financial services making up 15% of Malta's GDP, both government and the Opposition believe that such a tax would harm Malta's economy. "At EU level we are discussing FTT which for small countries including Malta is a non starter. Some form of taxation should be due by banks. At the moment it is unknown how much banks are paying in VAT on input. In principle, all productive sectors including financial services should pay their dues. Besides corporation tax they may be asked to pay VAT but get a refund of the tax paid on their input. There should be no bias against any sector."

As for the introduction of the Tobin tax, Scicluna said this would hinder our competitiveness worldwide. "I would like to evaluate how many jobs would be at stake if this was introduced in Malta. Labour's MEPs voted for the evaluation of innovative taxes which favour climate change goals, developing countries and keep the financial services sector in check. We voted in favour to consider and investigate the implication of the Tobin tax and other innovative taxes.

"In principle, we agree with the Tobin tax if it is levied worldwide. But firstly we must look at our own turf. I want to know the set up of the industry, the number of jobs at stake what income is generated. Also, we need to separate the domestic institutions and export oriented companies."

The Tobin tax, dubbed the 'Robin Hood tax' is intended to tax financial transactions. In December Malta, together with the UK Tory government opposed the introduction of this tax in the EU. "There are attempts to block small country's competitiveness by bigger countries. I have seen this with my own eyes in Brussels. I agree that companies should be transparent but small countries should be left to survive even if they have an advantage is some fields."

He agrees with a shift from taxing labour to taxing consumption and pollution. However, he disagrees with a tax on luxury goods unless such a tax is unavoidable and does not hinder the local industry.

Scicluna also speaks about Malta's attempt to attract high net worth individuals who are ironically avoiding higher taxation in other countries. "These individuals could create jobs locally, and taxing them more to earn one or two million could scare other individuals. Tax should be dealt with professionally and not emotionally. On moral grounds, tax should be progressive and the rich should not only pay more but should pay a higher rate but you also have to look at other criteria."

This week, Scicluna was the target of harsh criticism in parliament, during the no confidence motion debate. Many government MPs accused him of wanting to remove the stipend system for students in tertiary education. In September 2008, Scicluna criticised the government for its reluctance to review the stipends system.

"Responsible politicians evaluate and review every policy, after a period of time. All I had said was that the system should be reviewed and this was also said by current education minister Dolores Cristina, the current University Rector, former minister Louis Galea and the Chalmers report. I did not suggest any loans or anything of that kind."

"All I said is review it and make it sustainable. I want to strengthen the system. The aim is to have no student anywhere in Malta hindered from participating in tertiary education because of a lack of support and income. We have to see whether we can strengthen the lower end of society."

"How many Mcast and university students come from the Cottonera area or from low income families? The system needs to be strengthened to ensure that people on low income are unhindered. If it is not reaching that goal, it will have to be supplemented.  Every tertiary student entitled to a stipend would remain receiving it."

On Gift of Life's accusations that he voted for abortion in the European Parliament, Scicluna says: "These are campaigns that do the country no good. The European parliament has no jurisdiction to introduce abortion anywhere in the world. Why should I vote against funds to fight AIDS and help reach the millennium development goals? The programmes are carried out in countries where abortion is legal. In principle, I am against abortion but I will not block billions of euros in funds for Africa to fight AIDS. I will not block the funds to be like Pharisee and say I am against because abortion is legal in your country. Not even Christ himself would do that. They can say whatever they like. I declared my position against abortion but I will never vote against programmes to help the poor."

Asked about Air Malta's restructuring plan - which is being scrutinised by the EU commission - Scicluna wonders about the number of years that Air Malta hid its real losses behind profits from its hotels and other subsidiaries. "If losses are hidden, then bad practice is encouraged. Management is not accountable by hiding behind losses. At this point, we have to look forward, and I will support the initiatives to restructure the airline, however we have to ensure that a proper restructuring plan is put into practice. The plan must be transparent. Government is irresponsible because this restructuring plan which might have a terrible effect on our deficit has not been fully included in the year's Budget estimates."