"Its the Economy ... Stupid!"

I have been asked to desist from writing again about the "democratic deficit" and reforms to correct it. I have been asked to write about something else. I have a commentator who keeps on telling me that its all about "the economy ... stupid!". So I will write about the economy. This subject takes me outside my comfort zone, which revolves around the law.I must quickly admit that my limited knowledge of theoretical economics is based on an "A" Level (actually "S" level that in my days, 1969-1970 school year, was one step higher than an "A" Level) in economics and politics. My practical experience is down to closely following current affairs and to having run and helped run law firms and related businesses.

Anyway, here goes. I will argue that the politics of our economy revolves around expenditure and not around the potential other area from which Gibraltar generates its wealth for the simple reason that certain factors reduce the room within which governments can manoeuvre.

There is a tendency in Gibraltar to use the word the "economy" interchangeably to mean what is in fact the economy, meaning how wealth is generated in Gibraltar and what should be termed "government finances", meaning the monies that the government receives and spends. Undoubtedly the health of government finances is directly related to and dependent on the health of the economy. Conversely, the the need to raise public revenues combined with the knock on effect that need has on the level of direct and indirect taxation impacts on the health of the economy. The reason is simple. Gibraltar's economy, like most economies relies on its competitive edge. The competitive edge of Gibraltar's economy is reliant on fiscal leverage. In simple terms this means low direct and indirect taxes because Gibraltar has no natural resources. However, it does have some 'natural' advantages.

First is its geographical location. This helps in the main 4 sectors of our economy: ship repair, port facilities, bunkering and tourism. Other than, possibly, for port facilities much of the competitive edge on the other of these 4 sectors is achieved by fiscal leverage. Comparatively lower indirect taxes on oil makes bunkering a feasible activity. Comparatively lower indirect taxes makes Gibraltar attractive to masses of day tourists who are the core of the tourist sector. I am not sure that geographical location alone is sufficient to maintain current levels in these sectors.

Second is legislative agility. Legislative agility is a double edged sword because, just as it can be used to benefit one sector, business, company or individual, it can equally be used to detract from another. Therefore, directly tied to this advantage goes the requirement for political stability and trust. It is of utmost importance that Parliament, Government and Opposition are seen and believed to be stable and to be avoiding any whimsical or impulsive behaviour.

Appropriate behaviour is required in order to portray the stability that is needed for all sectors but, primarily, for the other two major sectors of the economy: financial services and gaming. It is, however, this legislative agility that permits Gibraltar to develop these 2 sectors by being able to speedily react to situations and external factors, thus allowing Gibraltar to become an attractive jurisdiction or retain its attractiveness as a jurisdiction. One essential requirement to ensure continued growth in these two sectors is a competitive tax environment.

What this simple analysis reveals is that it is most unlikely that new areas of economic activity will be found or can be developed. So there is little or no politics to be played out on this aspect of the economy. Gibraltar has what it has and can exploit only what it has. What our government from time to time can do is maintain the fiscal leverage and use legislative agility. What our government from time to time can do is ensure prudence in expenditure and to prioritise different areas of expenditure. It is in these two aspects of economic policy that politics can be played out by the different political parties.

Too much expenditure results in too much borrowing, which in turn gives rise to revenue commitments that become fixed. In the absence of an ability to refinance or increase borrowings, which in the present international economic crisis is likely, the demands on recurrent government revenues to service capital and interest repayments continue. It can result also in the Government's liquidity being reduced.

The cure is either to reduce expenditure, which can result in austerity measures, like those being faced by many European countries, or to increase taxation. Increased taxation will adversely affect our economy which is reliant on competitive fiscal leverage. Both are options that do not bear thinking about. Additionally, the belief, encouraged on some occasions by the Chief Minister by his pronouncements on economic growth, that the international economic crisis will not touch Gibraltar is to believe that Father Christmas exists.

Lack of money in other countries, which is one aspect of the crisis, will result in less consumer and business expenditure. It will lead to a reduced demand, at a minimum, for our tourist and finance centre and other services. In time these factors can result in reduced government revenue. This reduced economic activity could lead to a downward spiral, which has to be avoided at all cost. It can only be avoided by prudent expenditure policies.

It is important at the forthcoming election to closely look at, not only policy statements contained in manifesto relating to expenditure, but also at immediate past behaviour. It is palpably obvious that the present Government is on and has for a long time maintained a spending spree with our money. I has done so to both retain power and to see if it can recover some electoral advantage. I would suggest that this behaviour, in the present international economic climate, is irresponsible and unsustainable. What we should look for is policies that espouse prudence and are not profligate, even if this course will seem a worse political offering in the short term. Prudence will stand Gibraltar in good stead in the longer term.

We should also look at the prioritisation of expenditure on necessities and not luxuries. This means prioritising expenditure that favours the needy and disadvantaged. One measure by which a society is judged is by how well it treats its people. I urge voters to be a little selfless in how they choose the next government. If they do so they will be helping others. They will also be helping themselves, in the longer term, to maintain a standard of living that will continue to be envied.