Artist
29thMay2005, 13:45
At long last the government does not seem to be in a state of total denial any longer regarding the dire straits our economy is in – an unfortunate case of better late than never. If Lawrence Gonzi has one merit it is his decision, on his elevation to premier, to admit that our economy was moribund, in direct contrast to his predecessor who was able to keep the good feel factor going for very long – too dangerously long, rather! What our Prime Minister continues denying however is his party’s responsibility for the economic coma we are in, citing every reason under the sun. When things are going well they claim all the merit; when the situation deteriorates then it’s globalisation, China, terrorism, Sars (remember that?), and every other excuse the spin-doctors care and dare to concoct.
The facts speak clearly and unequivocally. Over the last four years, we have witnessed two years of very small growth and two years of negative growth, as a result of which the economy at the end of 2004 was as big (barring inflation) as the economy at the end of 2000 – effectively an economy in suspended-animation mode. Despite the gloom, the government has obviously been keen to portray as best a picture of the situation as is reasonably possible. Consequently, the gymnastics with statistics have now reached new heights. Parliamentary Secretary Tonio Fenech makes it a point to remind all of us that in 2004 our economy grew by 1.5 per cent; modest he says but still on the growth curve. He gets away with this because he was not around before 2004 and nobody is going to blame him (personally) for negative growth in the two years preceding his entry into Parliament. He also gets away with it because he does not compare our growth rate with the nine other “new” countries that in 2004 averaged almost five per cent Clever of him, ha?
The Prime Minister has made a few hideous attempts at rekindling the EFA-type good-feel-factor by citing the number of mobile phones the Maltese have, or by telling us that the economy must be healthy because the Maltese have stacked away another hundred million in local banks, forgetting (or worse still, ignorant of the fact) that saving is the chief reason why our economy has under-performed so badly over the last years; people simply prefer putting their money in bank deposits rather than spending or investing it. Francis Zammit Dimech has made a number of attempts to sweeten the flat-to-down statistics on tourist arrivals in one particular month blaming the timing of Easter. Wonder where he picked up such an excuse from? Berlusconi perhaps? The Oscar for best excuse must go to one who is undoubtedly one of this country’s finest businessmen, Robert Arrigo. A couple of weeks ago on Smash TV he declared that the economy could not be so bad – you know why? Simple… here it comes… because a few hundred Maltese flew to watch some Champions League match, and another few hundred (perhaps even a few thousand, conceding) travelled to Rome for the funeral of the late Pontiff. The lengths some people go to!
The reality out there, in the real world that many government politicians don’t seem to inhabit any more once they land in Parliament, is very different. The business community is worried to say the least, while many employees feel uneasy about their economic well-being and uncertain about future prospects. While admitting that we Maltese do tend to overdose on grumbling, the general economic situation out there (particularly in the retail sector) is really not at all good. On the other hand, when the government reads deep into statistics it is evident that the situation isn’t good, however it does not seem as bad as those in the business community will have us believe – after all our economy did grow by 1.5 per cent last year both Prime Minister Gonzi and Parliamentary Secretary Fenech must be saying. Why is everyone nagging so much? For crying out loud, this week even Mr Trichet (European Central Bank Governor) has commented positively on Malta’s growth statistics. So what is wrong? Is it simply a case of employers’ representatives grumbling as a form of lobbying? I don’t think so – unfortunately I am of the opinion that our statistics are (out of pious necessity) beguiling to the point of creating two realities. The reality economic operators live, and the reality the government and its institutions see. Let me amplify.
Let’s keep the argument simple, stupid. The statistics our government is presented with do not factor that unspeakable, despicable taboo known as the black economy. No reliable estimate is available but the black economy can be anything from 15 per cent to 30 per cent of Malta’s economy. The problem is just that – nobody really knows how much. What is most probable is that over the last 10 years more of the black economy has been “captured” into (what shall I call it?) the “white” economy. This has come about due to the introduction of VAT, the flat 15 per cent withholding tax on bank interest, repatriation schemes (versions 1,2 and 3) and more recently the mere establishment of the Tax Compliance Unit, which is making businesses think a bit more than twice before engaging in any further monkey business.
Let’s take a more simplistic example of what I think is going on. Imagine for a moment that the Maltese economy consists of just one shop that only sells radios. Let us say that in 2000 he was selling 130 radios a month, but for the obvious reason (one that politicians are ill-advised to admit) only 100 radios were being “punched” into his cash register. What the government interprets is that the economy’s output is 1,200 radios per annum, because the “lost” 360 radios are not picked up in the stats. Forward to 2004 – the economy has worsened and in reality our shopkeeper is only selling 120 radios each month. However, in order to keep his accountant, the Inland Revenue and the VAT department all happy, he still “punches” the sale of 100 radios into his cash register and “forgets” the other 20. For the shopkeeper the economy (in its totality) has actually shrunk from 130 radios per month to 120 radios per month – more of the “black” economy has been legitimised into the “white” economy. However, the government ignorantly sees that the economy consisted of 1,200 radios in 2000 and is still 1,200 radios until last year. Nothing to write home about, but hardly the end of the world!
The situation described above and multiplied many times over in our economy is what I believe has created this mismatch between what economic operators are witnessing and what our government is reading into. It’s not that our businessmen are (all) grumbling opportunists or our ministers (all) a bunch of first class liars. The problem is that there exist two interpretations of our economic reality. The real one, and the surreal one. As the Americans are fond of saying, our government and business community are “not singing off the same hymn book”. There is a side to this dilemma that is a quasi tragic-comedy, because while the business community feels the need to cry out even louder, in truth it cannot explain its malaise without “incriminating” itself. The truth may be that our economy is not stagnant, but in actual fact is shrinking; we may have been in deeper recession without the government being able to admit it! It’s the textbook case of a fiscal double-edged sword.
What needs to be done? I believe that we have to start considering a serious reform in our taxation systems in order to simplify compliance and capture the “black” economy in a way which ensures that while the government continues collecting the revenue it needs (that, by the way, does not include the revenue to spend on the construction of a super-extravagant Lm14 million quay at Cirkewwa), it can also be in a position to reward the compliant taxpayer, regularise the petty evader and weed out the blatant abuser. Fairness should always remain the overriding principle underpinning any tax system. In order to do so the government must have reliable (if not precise) measures of our “black” economy, which it may or may not choose to publish, that will give it a more reliable status report on our economic performance. What isn’t measured can’t be controlled. The truth about our economy must never be politically sidelined. There is only one thing that can (economically– speaking) be worse than a shrinking economy – not knowing by how much that same economy is actually shrinking. Once and for all, let’s have our economic reality in black and white!
Indipendent on Sunday
Edward Fenech
The facts speak clearly and unequivocally. Over the last four years, we have witnessed two years of very small growth and two years of negative growth, as a result of which the economy at the end of 2004 was as big (barring inflation) as the economy at the end of 2000 – effectively an economy in suspended-animation mode. Despite the gloom, the government has obviously been keen to portray as best a picture of the situation as is reasonably possible. Consequently, the gymnastics with statistics have now reached new heights. Parliamentary Secretary Tonio Fenech makes it a point to remind all of us that in 2004 our economy grew by 1.5 per cent; modest he says but still on the growth curve. He gets away with this because he was not around before 2004 and nobody is going to blame him (personally) for negative growth in the two years preceding his entry into Parliament. He also gets away with it because he does not compare our growth rate with the nine other “new” countries that in 2004 averaged almost five per cent Clever of him, ha?
The Prime Minister has made a few hideous attempts at rekindling the EFA-type good-feel-factor by citing the number of mobile phones the Maltese have, or by telling us that the economy must be healthy because the Maltese have stacked away another hundred million in local banks, forgetting (or worse still, ignorant of the fact) that saving is the chief reason why our economy has under-performed so badly over the last years; people simply prefer putting their money in bank deposits rather than spending or investing it. Francis Zammit Dimech has made a number of attempts to sweeten the flat-to-down statistics on tourist arrivals in one particular month blaming the timing of Easter. Wonder where he picked up such an excuse from? Berlusconi perhaps? The Oscar for best excuse must go to one who is undoubtedly one of this country’s finest businessmen, Robert Arrigo. A couple of weeks ago on Smash TV he declared that the economy could not be so bad – you know why? Simple… here it comes… because a few hundred Maltese flew to watch some Champions League match, and another few hundred (perhaps even a few thousand, conceding) travelled to Rome for the funeral of the late Pontiff. The lengths some people go to!
The reality out there, in the real world that many government politicians don’t seem to inhabit any more once they land in Parliament, is very different. The business community is worried to say the least, while many employees feel uneasy about their economic well-being and uncertain about future prospects. While admitting that we Maltese do tend to overdose on grumbling, the general economic situation out there (particularly in the retail sector) is really not at all good. On the other hand, when the government reads deep into statistics it is evident that the situation isn’t good, however it does not seem as bad as those in the business community will have us believe – after all our economy did grow by 1.5 per cent last year both Prime Minister Gonzi and Parliamentary Secretary Fenech must be saying. Why is everyone nagging so much? For crying out loud, this week even Mr Trichet (European Central Bank Governor) has commented positively on Malta’s growth statistics. So what is wrong? Is it simply a case of employers’ representatives grumbling as a form of lobbying? I don’t think so – unfortunately I am of the opinion that our statistics are (out of pious necessity) beguiling to the point of creating two realities. The reality economic operators live, and the reality the government and its institutions see. Let me amplify.
Let’s keep the argument simple, stupid. The statistics our government is presented with do not factor that unspeakable, despicable taboo known as the black economy. No reliable estimate is available but the black economy can be anything from 15 per cent to 30 per cent of Malta’s economy. The problem is just that – nobody really knows how much. What is most probable is that over the last 10 years more of the black economy has been “captured” into (what shall I call it?) the “white” economy. This has come about due to the introduction of VAT, the flat 15 per cent withholding tax on bank interest, repatriation schemes (versions 1,2 and 3) and more recently the mere establishment of the Tax Compliance Unit, which is making businesses think a bit more than twice before engaging in any further monkey business.
Let’s take a more simplistic example of what I think is going on. Imagine for a moment that the Maltese economy consists of just one shop that only sells radios. Let us say that in 2000 he was selling 130 radios a month, but for the obvious reason (one that politicians are ill-advised to admit) only 100 radios were being “punched” into his cash register. What the government interprets is that the economy’s output is 1,200 radios per annum, because the “lost” 360 radios are not picked up in the stats. Forward to 2004 – the economy has worsened and in reality our shopkeeper is only selling 120 radios each month. However, in order to keep his accountant, the Inland Revenue and the VAT department all happy, he still “punches” the sale of 100 radios into his cash register and “forgets” the other 20. For the shopkeeper the economy (in its totality) has actually shrunk from 130 radios per month to 120 radios per month – more of the “black” economy has been legitimised into the “white” economy. However, the government ignorantly sees that the economy consisted of 1,200 radios in 2000 and is still 1,200 radios until last year. Nothing to write home about, but hardly the end of the world!
The situation described above and multiplied many times over in our economy is what I believe has created this mismatch between what economic operators are witnessing and what our government is reading into. It’s not that our businessmen are (all) grumbling opportunists or our ministers (all) a bunch of first class liars. The problem is that there exist two interpretations of our economic reality. The real one, and the surreal one. As the Americans are fond of saying, our government and business community are “not singing off the same hymn book”. There is a side to this dilemma that is a quasi tragic-comedy, because while the business community feels the need to cry out even louder, in truth it cannot explain its malaise without “incriminating” itself. The truth may be that our economy is not stagnant, but in actual fact is shrinking; we may have been in deeper recession without the government being able to admit it! It’s the textbook case of a fiscal double-edged sword.
What needs to be done? I believe that we have to start considering a serious reform in our taxation systems in order to simplify compliance and capture the “black” economy in a way which ensures that while the government continues collecting the revenue it needs (that, by the way, does not include the revenue to spend on the construction of a super-extravagant Lm14 million quay at Cirkewwa), it can also be in a position to reward the compliant taxpayer, regularise the petty evader and weed out the blatant abuser. Fairness should always remain the overriding principle underpinning any tax system. In order to do so the government must have reliable (if not precise) measures of our “black” economy, which it may or may not choose to publish, that will give it a more reliable status report on our economic performance. What isn’t measured can’t be controlled. The truth about our economy must never be politically sidelined. There is only one thing that can (economically– speaking) be worse than a shrinking economy – not knowing by how much that same economy is actually shrinking. Once and for all, let’s have our economic reality in black and white!
Indipendent on Sunday
Edward Fenech