No gain for the middle class | Tonio Fenech

This year the extraordinary shootout involving one of the home affairs minister’s chauffeurs has overshadowed the customary budget discussions.

Naturally, the unwarranted incident is the talk of the town and in his attempt to downplay the incident, Prime Minister Joseph Muscat dragged former finance minister Tonio Fenech – who for six years was the face of the PN government budgets – into the controversy.

In his attempt to downplay calls for Mallia’s head, Muscat compared the case to that involving Noel Borg Hedley, formerly Fenech’s private secretary, who was found guilty in court of having solicited bribes from construction firm JPM Bros.

“In the past, government would say that [Borg Hedley] was acting on his own initiative. I won’t do the same thing: in this case, the driver was acting on his own and the minister was not informed and did not give him any instructions. If the inquiry shows that the minister gave instructions, then political responsibility will have to be carried,” Muscat said on Friday.

A few hours later I’m sitting in Fenech’s office in Attard and upon asking him for his reaction, a perplexed Fenech says “Firstly, he [Muscat] had expected me to shoulder political responsibility back then. So he cannot now say that because Tonio Fenech did not shoulder responsibility, neither should Manuel Mallia.

“Mallia must now live by Muscat’s creed. Moreover, the Prime Minister cannot change tack because before the 2013 election he promised full accountability. Muscat’s argument does not stand because we now expect him to stand by his promises.”

Explaining that he never instructed Borg Hedley to take any money, Fenech said that the chauffeur involved in the shootout carried a weapon with Mallia’s consent.

“Mallia is also lying on the fact that all home affairs ministers are protected by armed guards. I never lied and I can never be compared to Mallia because the minister also lied about the shots being fired into the air,” he says, adding that Borg Hedley had been removed as private secretary before the bribery case happened.

Following the brief diversion, we go back to Fenech’s home turf and I ask him why the opposition has described the 2015 Budget as socially unjust.

“The Government talks very nicely but when you look at the figures it’s not doing much to implement its pre-electoral promises.”

Although in his career Fenech was chastised by Labour and some quarters of the media over a number of blunders, such as his infamous trip to London on the private jet of a local businessman to watch his favourite football team, his grasp of financial and economic matters is undeniable. 

He eloquently explains that while the high income earners will enjoy a 4% tax cut and lower income earners will benefit from an in-work bonus and other welcome measures, the people in between are worse off following the budget.

 “Before taking office, this government promised a fair distribution of wealth, without the exclusion of anyone. But this budget has discarded a lot of people, including vulnerable people such as pensioners,” he says.

He argues that although Labour had promised that pensions would reach 60% of the average national income, pensions are well short of that.

“The 58c COLA increase coupled with the one-off €35 bonus is not enough for pensioners,” he says, adding that pensioners are worse off under Labour.

Fenech adds that Muscat’s darling middle class did not benefit from the 2015 Budget.

“When still in opposition, Muscat argued that the middle class was being squeezed. But what has the middle class earned in this budget? All they got is the 58c increase and €35 bonus and only the upper middle class enjoyed the income tax cut.”

He explains that the 4% income tax cut – a measure announced by the previous PN government and implemented by the current administration – only affected the upper middle class which earns more than €28,701.

“The real middle class did not get anything apart from the €10 to €15 increase in the cost of car licences and the 1% increase in all insurance policies. A normal middle class family of four with two cars and a home insurance policy have to fork out between €60 and €80 a year in additional expenses, but all they got is €35.”

He continues that ironically a number of families would have enjoyed a bigger weekly increase had the energy tariff reduction been excluded from the COLA mechanism.

“If the government wanted to be socially just it would have worked out the COLA increase by excluding the impact of energy bill reductions and take into account the impact these had on inflation and give a permanent increase through a tax reduction or increase in pensions.”

But wouldn’t an income tax reduction also be unjust since those who do not need it would have also enjoyed it?

“We proposed a €170 income tax reduction for those who did not enjoy a tax cut and an increase in pensions, edging pensioners closer to 60% of average national income,” he says.

He adds that the government increased its expenditure by €100 million, of which up to €50 million will be going in wages.

“Instead of increasing 2,400 jobs in the public sector the government could have used the money to fund the measures we proposed. The choices this government is taking are simply wrong.”

Fenech stresses that this government is hell-bent on spending money on PR exercises and events “to alienate people while claiming that there are no funds for more important things.”

Shedding doubt on the government’s energy plans, Fenech says that since the €320 million deal with Shanghai Electric Power is yet to be signed, the government allocated more funds to Enemalta to cover reductions in energy bills.

“Although they promised that energy tariff reductions will not be paid for by the taxpayer this budget increased Enemalta subsidies by €14 million, concealed as a vote to create an electric energy reserve. If these €14 million had been distributed to the people it would have been more socially just.”

I take him back to the opposition’s claims that the public sector has been inflated by over 4,000 jobs.

According to government claims in October 2013, the public sector sees some 1,500 employees retiring each year and that the government planned to replace only 1,000, save for jobs in health and education.

Statistics show that over 2,000 new public sector jobs were registered over the past 12 months with over 800 jobs created in health and education and over 900 who in January will be absorbed by the Spanish company which will operate the public transport services.

So is the opposition inflating the numbers to score political points?

Fenech explains that in 18 months, around 2,000 public servants retired and understandably some of them especially in education and health need to be replaced, hence the government’s commitment to replace two-thirds of them.

But Fenech says that the government has its priorities wrong and points out that the number of employees in the public transport service have increased by 300 since the government nationalised the service in January while at the same time it is refusing to employ 90 health professionals.

“Of these 4,000 people employed by the government, around 800 are administrative positions which include cleaners, messengers and other non-professional jobs. I ask myself, did we need to employ these people? What’s certain is that the finance minister should stop playing around with figures and stop attacking the National Statistics Office when the numbers do not back up his claims.”

But are all 4,000 jobs superfluous or is it just the 600 to 700 administrative jobs that were unneeded?

“Yes, you have the administrative jobs and the former Arriva workers, so in total you can say that around 2,000 jobs were surplus,” he insists.

In recent months the National Statistics Office has been embroiled in political controversy and this month the opposition expressed concern at the government’s decision not to renew NSO head Michael Pace Ross’s contract.

Why this concern I ask.

“Pace Ross is a reputable person and on his watch the NSO was never reproached for any wrongdoing at a European level, so I cannot fathom why his contract was not renewed,” he says, adding that the government was probably aiming at having an office which compiles statistics in the way it is told to by the current administration.

“We’ve come to a point where we should have Edward Scicluna appointed at the helm of NSO because it seems that he’s the only one who has a good knowledge of statistics,” Fenech says.

Recalling the origins of the Greek financial calamity in the tampering of statistics, Fenech warns Scicluna to stop interfering in statistics because “if Malta loses its credibility with Eurostat than we’ve had it and from aiming at becoming the best in Europe we’ll become the worst.”

One of the 2015 Budget’s aspects which is hard to criticise is the benefits for low income earners. However I ask Fenech whether short-term measures are the answer?

“This government promised to eradicate poverty within its first term in power, however in his budget speech Scicluna said the government is aiming at eradicating poverty within 10 years. So unless the government is planning to extend its term by five years, it is an admission that it will not fulfil its promise by the end of the current term.”

Despite acknowledging the continuation of a number of measures aimed at the lower income earners, he points out that the government’s failure to address poverty was not being underscored by the PN but by leftist activists and academics, including Labour party activists “who are clearly telling this government that it’s anything but Socialist.”

“For some people it’s not enough to offer them training and educational programmes to elevate them from poverty and encourage them to join the labour force. You need to address other endemic problems on a social level.”

The biggest flaw in this budget, Fenech says, is the lack of a cohesive economic vision.

“Previous budgets presented by the PN had a clear strategy, where we wanted to go and what our strategic targets were. Each and every one of our budgets pinpointed a number of new sectors, such as financial services, digital economy, creative economy, gaming and so on and we would outline incentives and measures to strengthen new economic sectors. Where is the vision in this budget? It’s all over the place. The first section is focused on addressing dependency on welfare, but from then on it’s a mess. It’s a collection of ideas from Islamic banking to monuments and from students to sewage problems in Marsa.”

Fenech says that while headline figures show that the country’s economic performance was moving in the right direction, especially the growing GDP and low unemployment, he’s concerned with the fact that 45% of GDP is generated by government expenditure at a time when expenditure should be reduced and unemployment figures were aided by the increase in public sector jobs.

“With the national debt rising above 70% of GDP we are simply not moving in the right direction. What we have is not sustainable and at one point it will dry up. And when public spending dries up what will replace it?”

He says the solution does not simply lie in public private partnerships, the country needs to attract long-term and productive investment from the private sector.

Moreover, Fenech says the government’s belief that the construction industry alone will act as a catalyst and drive the economy forward is ill fated.

“This government believes that through construction alone the economy will stand on its feet.”

Isn’t this what consecutive governments have done, I ask.

“No, we viewed construction as a complementary sector and not as the main driving force. It’s useless to build new apartments when we needed offices for the financial services sector. Se we encouraged developers to invest in offices. It will simply not work if we go back to the old model of building real estate in the hope that somebody will purchase them and pile pressure on the planning process,” Fenech says, adding that this was already happening with planning permits being issued like hot cakes.

Mega projects announced by this government, such as the White Rocks, the maritime hub and land reclamation have remained on the drawing board because they do not go beyond real estate, he says. 

Fenech says that he is reliably informed that the land reclamation project has stalled because local banks are reluctant to back investors because of their high-risk nature.

“We need to attract investment which creates a product which is attractive in the long term and which has a high value added. The country needs to strengthen and attract foreign and local investment in tourism, financial services, IT, manufacturing and new sectors such as the creative and digital industry to ensure that they remain and flourish.”

The budget includes an overhaul of the taxation system on the transfer of property, with sellers no longer being able to choose between paying 12% tax on the value of a sale or 35% on the gains they declare.

The new system will see a discount for developers, who will pay 8% tax on the value of the property while individuals who do not usually trade in property will pay just 6.5%.

In the case of property acquired before 2002, the tax payable will be cut from 12% to 10% of the sale.

Fenech says this measure was introduced without a proper consultation process with notaries and accountants and will lead to fiscal evasion.

“Companies which do not exclusively deal in property development, will lose money while property speculators will now be tempted to under declare the costs. I’m not surprised this measure was proposed by people close to the government who stand to gain.”

Fenech does however look favourably at the removal of the eco tax which many businesses blame for creating an unlevel playing field.

Explaining that the tax was introduced just before he was appointed parliamentary secretary for finance, Fenech says it wasn’t his “favourite tax” because it does not give a good return for the administrative efforts it requires.

“It would have been better to invest the money in efforts to fight tax evasion or collect VAT,” he says.