In his last report to the general assembly of the Banca d’Italia (Italian Central Bank), Mario Draghi listed the areas which need to be given attention to achieve economic growth in Italy.
Mr Draghi has been occupying the post of governor of the central bank of Italy for a number of years and is the president designate of the European Central Bank, and evidently used his past post and his future post to full effect to deliver a lesson in economics to government, economic policy makers, the trade unions and the business sector.
The challenges that the Italian economy is facing are not the same as those of Malta. Our unemployment rate is much lower, while our growth rate is much higher. The structure of the economy is different and the Italian economy has far too many rigidities when compared to ours.
However, the principles remain very much the same. And it is worth focussing on these principles as they may provide strong indications on how to manage our economy in future.
Mr Draghi attached a great deal of importance to the need to have a balanced budget. However, he warned that a balanced budget is not achieved by increasing taxes and cutting down on capital expenditure, but rather by reducing recurrent expenditure.
Even on this point he sounded a warning. He stated that one cannot just adopt blanket policies that aim to reduce recurrent expenditure by a certain percentage across the board, as this would risk reducing resources for important policy areas such as education, health and social welfare.
He advised that one needs to analyse recurrent expenditure on a line by line basis, such that any reductions target waste and resources are allocated to meet real, relevant and important objectives.
In this regard, one cannot emphasise too much the need to determine outputs and outcomes as much as inputs at the time government presents its budget. Any business organisation seeks to establish what its results should be when allocating resources.
Why cannot we adopt the same principles in our public sector? Our government budgeting process goes into great detail about the resources being used and what they cost (inputs).
However, little is said on the results to be achieved (outputs) and the impact on our country (outcomes). Moreover, we look at the size of our deficit and stop there, but little is said about how revenue can be maximised and costs are reduced (economy), the use of resources (efficiency) and the extent to which objectives are achieved (effectiveness).
The second element of Mr Draghi’s lesson in economics was about the need to maintain and strengthen the competitiveness of the business sector. He highlighted four aspects on how to achieve this – improve productivity, investment in training and education, investment in infrastructure and simplify regulations.
Starting with last aspect – simplifying the regulatory framework – Mr Draghi did warn that this does not mean weakening the authority of the state as a regulator. In fact he emphasised that the state should do more to reduce tax evasion. Investment in education, training and infrastructure is an integral part of the facilitating and enabling role of the state. The improvement in productivity implies taking into account the effects of the globalisation process.
It is easy to understand how this can be applied to Malta. Although government’s role in the operation of our economy is much reduced when compared to what it was just 25 years ago, its impact is still very great and there is no doubt that red tape (which goes beyond the simple elements of control) does take its toll on the operations of a business.
One only needs to take account of the extensive amount of form filling that businesses still need to do. The government needs to assess critically whether it is fulfilling its role well in providing economic direction and in facilitating and enabling businesses to grow.
One may sometimes ask what the politicians can do further to strengthen our economy, given that private enterprise is very strong, the growth rate is more than acceptable and investment keeps coming. Mr Draghi’s lesson in economics indicates that, irrespective of our results, the reform process cannot be stopped. And the next stage of our reform needs to include measures that achieve a balanced budget that go beyond a simple cost-cutting exercise and measures that improve the competitiveness of businesses operating in Malta.