Changing a system of dependency | Edward Scicluna

Finance Minister Edward Scicluna is riding a wave of positive economic 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, Scicluna 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 government signed up for in 2013, which means less revenue from direct taxation but more pressure on Scicluna to finance these tax cuts from other sources of revenue.

“The EC has been pushing for reforms, 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 consumption. 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 higher 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 targeting?

“The deficit is based on what is accrued, 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 Enemalta. 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 Electric 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 discretionary measures. The income tax cuts and the lost revenue from the asset registration scheme will bring the net impact of discretionary revenue measures to 0.7% of GDP. But Scicluna 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 manage 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 important 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 automatically 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 deficit. 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 increasing the deficit by over €80 million over the previous year, we reduced 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 sector adds to the government’s expenditure, 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 employment, especially before an election: 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 election 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 pressure. 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 pressure is unprecedented. But there are also other pressures coming from health and education. You look at education 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 Germany, for example? We can gain efficiency 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 precarity – part-time employment as a primary job has increased by 7% on their watch, which makes it a general 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 happening 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 manufacturing, by some 300 persons; even retail has increased by some 600.

“It also shows that we have to improve the quality of our statistics,” Scicluna says, trailing into yet another controversy about job statistics.

“How can we have retail jobs increasing 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 academic,” Scicluna replies. “I’ve taught all the people in the NSO, in economic 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 annoyed 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 critical 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-quality work. I’m not embarrassed about that.”

Scicluna also appears unperturbed about a recent downgrading of STMicroelectronics NV by Morgan Stanley over a deceleration in demand. I point out to him that, in Moody’s latest report, in 2013 manufacturing had contributed 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 lesson to be learnt it’s diversification. We can’t afford to rely on one sector, branch or firm, no matter how successful 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 mechanism that has kept industrial peace.

Before putting on his ministerial hat, Scicluna the economist argued for a revision of COLA that would tag the annual salary increase to productivity, rather than inflation. He flip-flopped in 2013 on the issue when he proposed changes to the mechanism to better reflect Malta’s productivity and bring it in line with EU expectations, before backtracking 24 hours later to say the government did not have this on its agenda and was not proposing any changes.

“The COLA today is being criticised for being so low when in the past it would be criticised for being so high… all this talk about productivity essentially is, ‘it’s too high for us to be competitive’. We’ve come to a year where COLA is too low for the unions’ liking or those on the minimum wage,” Scicluna says.

The irony is that in the year where the 25% cuts in energy prices have pushed inflation down, it will be the low-income earners who actually use less energy in the first place, who are being hard hit by the low COLA.

“COLA mirrors inflation from the retail price index… is the weighting out of date? Yes, because we should carry out a household budgetary survey. But this would give more weighting to new goods, which normally are more competitive and lower-priced. So it won’t increase the index, but it’s important to have a more realistic index.

“The other issue is minimum wage earners and pensioners. Do they have enough support? You have electricity, gas, medicine, the price of services, and whatever the government gives. If we provide this year, a €4,000 average cost of free childcare to each family, that’s also income. We should not just be measuring wages but also income in kind.

“Having said that, the government is aware that COLA is below the expectations of many people, and we’re going to address it.”

Conditional cash transfers are also big on Labour’s agenda, which has been determined to ‘make work pay’ by encouraging less dependence on social benefits through tapered payments for those beneficiaries who enter the labour market; and more recently, tagging mandatory school attendance to a supplementary income for families living on the edge of the poverty line. “Benefits take up one-third of our Budget, pensions and all… it is important to keep track on its distribution. In Malta we have free education, stipends to students, free medicine and health, free childcare… this is the full package, and COLA also comes into this ambit.”

Why wouldn’t a Labour government – the party which proposed a living wage – increase the minimum wage?

“Because Malta is a small and open economy that has to compete for its exports. Portugal, Spain, Italy, and Greece have a minimum wage that is pretty much equivalent. The northern countries have double our minimum wage. We could double our minimum wage but we would not be competitive with the countries near us.

“Minimum wage is paid to people with no skills whatsoever – so to improve their lot we have to give them skills, better education. The government has a €3 billion budget to distribute, which we must make sure spreads also to the lower end, without interfering in the labour market, which pays according to productivity. If we play with our competitiveness, we would be playing with our economic growth.”

Scicluna says that around 450 long-term unemployed have entered the labour market thanks to tapered benefits and active labour market policies, but discounts the notion that this might also push them into precarious jobs.

“If they are unskilled they cannot take top jobs. But the fact that they regain self-respect… I wouldn’t want to give a caricature of someone sitting on a sofa watching TV all day or sitting in a coffee shop, but you can say that your income and self-respect suffers from begging from the State. The fact that someone is earning it and still keeping the benefits since it pays for him to work, then you are encouraging them to participate in the labour market over the three-year period of tapered benefits.”

But is this also not the major part of your social spending: the real expense is pensions…

“Well, you’d be surprised. There are well over 6,000 single mothers in Malta getting a benefit package of up to €8,000-€9,000… a €50 million expense. There are benefits for people in need, unless they are abusing. But you can’t cut benefits because one-third of them are abusing. So when we talk about benefit dependence it is not minor.

“People are upset about people abusing of their benefits. Perhaps the scale of abuse is more than one thinks.”

Why are we talking about single mothers and ‘loafers’ as scapegoats on the entire benefits system?

“I don’t want to use that language because as an economist I believe every person is rational: they don’t work because it doesn’t pay. I believe them! It doesn’t pay because they lose all the benefits, because the State is telling them that it will take all their benefits back when they go out to receive a minimum wage. So I change the system and make them an offer they cannot refuse, making them earn more to go out to work.”

Wouldn’t the State have less stress on its coffers if it introduced a mandatory, second-pillar pension where both employers and employees contribute to a pension fund?

“We have introduced a voluntary pension, and we will see where we are. We can increase the incentives over the years. Let’s see how the €4,000 scheme fares, especially for young people.”