An RTK radio programme recently asked the politi-cal party leaders about the main events marking summer 2010. They picked various topics including the death of Guido de Marco, fireworks, corruption and divorce. Listeners were then encouraged to phone in to express their own views. Their topmost preoccupation was the deteriorating purchasing power. Budget 2011’s promise of a cost-of-living increase of €1.16 for 2011 will do little to alleviate their worries.
Neither should it be lightly dismissed as a mere perception. We were promised convergence to EU standards of living. The only convergence we are getting is in EU prices. The Ministry of Finance, the Economy and Investment, in its pre-Budget 2011 document, confirms that, in the period 2000-2009, Maltese wages have been falling compared to the EU27. Unfortunately, Budget 2011 fails to give clear, coherent answers to the questions it raises. Where are Malta’s economists?
We keep coming up with the same, recycled prescriptions. Is it political convenience? We keep talking about the need for higher value-added activities but then stop short of seriously delving into the dynamics that are preventing our economy from achieving higher productivity. Indeed, how is productivity in our economy being generated?
Instructively, according to pre-Budget 2011, the major contributors to growth in gross value added in 2009 were electricity and public administration. It is not hard to guess why. Value-added reflects also the ability to raise prices. Is this the type of value added increases that Malta needs to improve its standard of living? The deepening dependence of our economy on services has important implications for productivity. How you increase the productivity of a lawyer or an accountant is different from that of a factory worker.
The government should be seriously worried that the international sector of the economy is not contributing to economic growth. These issues deserve full, objective discussion. The well-being of all our society is at stake. Why is the government dedicating less time to the Malta Council for Economic and Social Development to discuss Budget 2011? Is it because it assumes that these issues are not important or, rather, because it has backed itself into a corner? Budget 2011 will change as much as €1.16 can change. Maybe the government is hoping that Vision 2015 will provide the Midas touch. It is a pity that even Vision 2015 remains a partisan, whirling exercise.
Next year, the economy is expected to continue recovering mainly on its own steam. The EU is insisting the government corrects its excessive deficit by about one per cent of GDP. This time it appears the EU means business. It is threatening to take disciplinary action unless the fiscal deficit falls to below the three per cent of GDP threshold. This is not an impossible task but the government should not continue to rely solely on the flexibility offered by its cash-based accounting system.
The pre-Budget 2011 document estimates that government revenue is expected to fall by 0.4 per cent of GDP. This could be due to less revenue being collected through the amnesty on income tax and national insurance arrears or the government’s intention to offer tax cuts (an electoral promise) to complement the €1.16 cost-of-living adjustment (COLA) increase. The government says its focus will be on cutting expenditure. The phasing out of recession-related “stimulus measures” will save the government 0.4 per cent of GDP. A further 1.0 per cent is to be saved through improved efficiency and cutting waste. These are noble objectives, provided they do not lead to an inferior public service.
Ultimately, fiscal sustainability is facilitated by economic growth. Pre-Budget 2011 notes that Malta’s labour and other costs compare well to those of EU27 and a core group of “direct competitors”. However, we continue to lose our competitive advantage. Such a situation warrants a changed analytic approach. In particular, we need to challenge some fundamental conceptions that are taken for granted, such as:
1. High-tech manufacturing is synonymous with higher value-added activities. If this were so Malta would probably be the richest economy in the EU given that high-tech goods account for a little less than half our manufactured exports. And, yet, recently, ST Microelectronics’ employees had to accept a cut in their remuneration package to salvage their job.
2. Competitiveness is secured primarily through low wages and costs. This would imply many local enterprises still operate as mere “production units” and need to be assisted and incentivised to take up research and development and marketing activities.
3. Higher productivity automatically leads to higher incomes. Pre-Budget 2011 is baffled that high productivity in Malta did not lead to higher wages. Other forces are at play such as economic liberalisation (resulting in lower prices in formerly protected sectors) and increased foreign ownership.
4. Spending more money on education and training will lead to higher productivity. Education needs to be aligned to our economic strategy with an emphasis on the development of competencies rather than pure knowledge. Also, the big divide in education has to be seriously addressed.
5. Economic diversification means economic development. We could be running on the spot. A thriving textile enterprise such as Nylon Knitting confirms that what counts is not the sector but how an enterprise competes.
Pre-Budget 2011 is a definite step forward. For the first time, the government admits the economy is not delivering and is failing to keep pace with its EU competitors. Will it now put the people’s interests first?
fms18@onvol.net