'It’s the economy, stupid'

It's true that it was an electoral promise by Lawrence Gonzi in 2008, but if you expected government to announce a downward revision of your income tax band in tomorrow's Budget, you may well deserve to be called raving mad.

You may be right to feel somewhat offended by the statement, but you are allowed to return it to sender, because the promise was attractive then, but definitely not opportune under the obvious dramatic events which were clearly in sight in 2008.

The so-called 'perfect storm' that hit the world markets since the collapse of Lehman Brothers in 2009, the widespread loss of jobs, and the billions of dollars paid out in bailouts to banks, were not quite enough, it seems.

Credit ratings agencies Moody's, Standard & Poor's and Fitch suddenly became world powers, downgrading the United States, and worse, exposing the eurozone to an unprecedented reality: over indebtedness.

Our European partners Ireland and Portugal required massive cash injections to keep the Single Currency afloat, and concerns grew further as Greece collapsed and required at least three multi-billion bailouts to stay alive, while fears of Italy being on the brink of collapse are providing us with an even more daunting prospect for the future.

Meeting the social partners last Friday and the Nationalist Party parliamentary group yesterday, Finance Minister Tonio Fenech spelt out the critical situation.

Revising tax bands can make sense in a bid to stimulate the economy, but the economy must be taken into its wider perspective, and there is practically no room to manoeuvre and respond to the social partner's demands, be they trade unions, or employers.

The country must rein in its deficit, and the European Commission is insisting that government reduces the deficit by a further 0.5% which in financial terms can be valued at €34 million less expenditure.

Government needs to ensure revenues to make good on its expenditure, which is mainly focused on a generous - but often described as unsustainable - welfare state, health and education.

Expenditure in these sectors is said to remain untouched, while further tax credits are to be granted to parents who send their children to private schools.

Government is "concerned" over the sustainability of private schools, should a fiscal incentive not be granted, and appears to have accepted the private school lobby, which has grown stronger over the years.

But a major uncertainty for government will remain the international price of oil.

The Prime Minister has refused calls by Enemalta and Water Services Corporation to increase utility tariffs, and will have to subsidise Enemalta's operations, which are expected to run into millions, as the price of oil is already nearing $100 per barrel.

In the absence of no hedging agreement, Gonzi is said to be worried about the situation which could eventually require corrective measures during 2012.

2010 and 2011 have already been difficult years for Gonzi, who merits applause for his endeavours in achieving important economic goals despite the turbulence around us.

Fenech will formally inform the House that the country has managed to reach its target of reducing the deficit to 2.8% and will aim to bring it further down to 2.2% in 2012.

The Budget may be considered as a "balancing act" as it will reveal an obvious cautious approach to the unknown perils of 2012.

Revenues from VAT have exceeded expectations for 2011, and are expected to marginally increase next year, granting government peace of mind for fiscal consolidation projections.

Government firmly believes that the targets set for reining in the deficit are reachable, as long as economic growth is ensured, at least in the region of 2%, save the complications of a possible recession fallout.

But while the risks of being hit by the fallout of a recession in our major trading partners in Europe and the United States, government is setting its eyes on the tourism industry as a key player in 2012, which could serve as an important contributor to safeguarding jobs and aiding economic growth.

With a further €1 million expected to be voted into tourism for marketing and incentives for the hospitality industry in both Malta and Gozo, major efforts are expected to keep visitors coming, despite the recession in their countries.

Business, which in this country is made up of small and medium sized enterprises (SMEs) are to have their already operational incentives 'fine-tuned', but GRTU director-general Vince Farrugia has reportedly persisted (up until last night) in attempting to lobby Fenech into delivering real incentives to the business community.

Fenech is reportedly being pressured into making the already existing schemes for SMEs effective and efficient, but will open up to incentivise the digital gaming sector, which is reportedly booming and paving the way to make Malta a hub that is expected to grow on a par with the online gaming industry.

But while the country needs to address urgent issues such as pension reform, it comes as a surprise to discover that Fenech will tomorrow announce a new allowance that will see 13,000 octogenarians who live alone benefit from an allowance that would enable them to engage home assistance.

Fenech is also set to announce how government is set to boost the economy by regenerating the property market through an ambitious scheme for urban conservation areas.

The plan is to fiscally incentivise hundreds of derelict property owners around the country to restore and renovate their properties for scope of sale or rent.

The measure is expected to be greeted with satisfaction from the Chamber of Commerce, which recently revealed statistics that empty properties have doubled over the past 10 years, with a dormant value of a staggering €7 billion.

But the measure comes as a contradiction, as Fenech is to announce an increase in excise duty on cement, which is expected to bring in more revenue for government.

Prime Minister Lawrence Gonzi must get 2012 right. It will be his last full year in office before his mandate is up and a general election is due towards midway 2013.

The Labour Party expects the Budget to be "an exercise in prudence, honesty and transparency," with shadow finance minister Karmenu Vella agreeing that it would be irresponsible for government to touch the income tax bands.

Slamming the electoral promise as a gimmick, Vella said that he expected a "cautious" Budget, while MEP Edward Scicluna expects an increase in maternity leave by four weeks, in a bid to increase the work force and encourage more women to stay in employment.

Chamber of Commerce, Industry and Industry president Tancred Tabone described the situation as "extremely delicate," adding that further to the vote of confidence in parliament last Monday, business expects political leaders to re-focus on the right priorities and not become too distracted by issues which were strictly local.

But while employers and trade union leaders emerged from Friday's meeting declaring themselves "disappointed" by their Budget preview, 2012 is set to be the year where the Malta Council for Economic and Social Development be actively monitoring the events that will undoubtedly unfold in the global economy.

Gonzi has an extremely difficult year ahead, whereby he must avoid any more further conflicts with his backbenchers.

For the Prime Minister, 2012 will be the most important test he has ever faced, and will need the support of all his Cabinet to deliver in all sectors they have been entrusted.

Local issues - such as the efficiency  of our public transport - are important, but faced with the developing situation in Europe and the eurozone, 2012 could turn out to be a vital year for what is to come in the years to follow.

Reducing the deficit is important, and one must augur that the ship will be steered cautiously and successfully through the storm that lies ahead, but let us not forget the growing pocket within the population which are nearing the poverty line, before we blame it all on the economy.