One of the issues that we keep coming up against is the size of the public sector. It is claimed that the public sector employs too many people; that additional employment is resulting in underemployment; that this underemployment eventually leads to inefficiencies; and as such not only does the taxpayer have to pay for jobs that have no rationale for existing but also for the inefficiencies caused to third parties.
On the other hand, one has to keep in mind that, because of its size, Malta does not enjoy economies of scale and, therefore, in order to maintain an element of specialisation in certain sectors, is likely to have a public sector that is relatively bigger than that of other countries.
A cursory look at some data could give an indication of the impact of the public sector on the economy in quantitative terms. In qualitative terms, making such an assessment is much more difficult, in that it is not possible, for example, to gauge the impact on wages in the private sector resulting from bottlenecks in the labour market caused by excessive employment in the public sector.
For example, what is the impact on wages of unskilled and semi-skilled persons in the private sector as a result of relatively high wages for such jobs in the public sector? Have such high wages in the public sector caused businesses to put up wages for similar posts and, therefore, caused these businesses to become uncompetitive?
Nor is it possible to gauge the impact of the possible inefficiencies in the public sector on the private sector. Have these inefficiencies caused additional employment in the private sector that would not have been required had these inefficiencies not existed? In the absence of such data, we will have to stick to published data.
The total number of persons employed in government departments totalled 30,960 in September 2005. This is over 600 persons less than a year ago and nearly 800 less than two years ago. Employment in government departments is at the lowest level in the last nine years.
Compensation to employees in government departments represented 23.2 per cent of the total compensation paid to all employees in Malta in 2004, while employment in government departments represented 23.0 per cent of the total gainfully occupied population. The share of public sector employment out of total employment stands at 32.9 per cent, compared to 35.3 per cent four years ago. All this seems to indicate that public sector employment is shrinking but it is still absorbing a relatively higher than average share of the GDP.
Government final consumption expenditure absorbed 21.3 per cent of total gross domestic product at market prices in the first nine months of this year, compared to 22.5 per cent in the same period in the last two years. However, it is significantly higher than the level registered for the whole of 2002.
Another interesting ratio is the percentage of gross household income taken up by direct taxes including social security contributions. In the first nine months of this year, this represented 16.8 per cent compared to 17.1 per cent last year. The corresponding figure for the whole of 2002 was 17.2 per cent, thereby indicating that the direct tax take up has been reducing slightly over the last years.
Indirect tax revenue represented 21.0 per cent of gross household income in the first nine months of this year compared to 19.9 per cent for the same period last year. In the whole of 2002, the take up by indirect taxation was 18.9 per cent of gross household income. Thus, the tax incidence (including both indirect and direct taxation) on household income was 37.8 per cent in the first nine months compared to 37 per cent last year and 36.1 per cent for the whole of 2002. Quite a clear indication of an increasing tax burden!
This would also mean that, although public sector employment is shrinking and public sector expenditure is being reduced, the impact of the public sector, through its tax take up required to fund public expenditure, is increasing. This has also given us the positive results we had this year on the fiscal deficit.
However, it is worth asking the question as to whether the size of the public sector is really the critical issue. Should we possibly turn around the question into whether the public sector is doing value-for-money? Could the public sector produce more with the resources it has at its disposal or could it produce the same as it is producing today for less resources? In economic terms, where resources are scarce, size is immaterial. What matters is what gets back in return for the resources used.