Few spoils for the victor
Whoever emerges as the winner of the general election this afternoon, will not be sleeping on a bed of roses. Running the country is never that. In today’s circumstances, it is particularly so.
The state of the economy and the financial situation, as well as of society, is hardly as great as we had been led to believe throughout the election campaign.
Within the economy, the financial and gaming sectors stand out as a success story. They supply the exchequer with very substantial tax revenues and the labour market with well-paying jobs.
They are also looking over their shoulders to see whether threatening changes in countries which have lost them will come into force. Manufacturing has levelled out and provides few new opportunities. Elsewhere, there are problems.
The construction industry, a traditional mainstay of the economy, is in the doldrums. It cannot be revived simply by issuing building permits for apartments with more speed than Mepa is accustomed to.
Run-of-the-mill apartments will only add to the massive overhang of residential accommodation accumulated over the years. There remains some demand for upmarket accommodation, but not such as to be enough to revive construction to its former pace.
Registered unemployment has been creeping up for the past 12 months. It now stands at over 7,000 individuals. Though we have one of the lowest unemployment rates in the EU in absolute terms, the number is high. Worse, the composition of the registered unemployed is such that the total includes too many workers who do not fit into the growth sectors of the economy.
The long duration of registering by a substantial proportion of the unemployed confirms there is a hard core of what may be termed permanent jobless.
The gaming and financial sectors will do nothing for them, even if they continue to expand. The 7,000 need specific targeting which has not been forthcoming, nor is it easy to create in a productive manner.
In the society at large there is very clear segmentation. That part of the population which can afford to eat out yields a happy restaurant indicator. It does not cover a high percentage of the population. Whereas a steep and rising cost of living does.
Also, there is a substantial chunk of people who live at the margin of, or even outside, society. Their relative and absolute living conditions suggest that, though we do not have large slum areas, we do have a social problem. In this regard, Caritas said so, aside from the social statistics. Few paid it real attention. Such neglect has to be made up for.
The problems carried forward, therefore, are substantial. They require bold decisions as well as a higher level of public expenditure, also needed to cover existing and new infrastructural projects plus implementation of the promises made in the electoral campaign.
That has to coincide with a commitment to reduce the fiscal structural deficit as a percentage of the Gross Domestic Product.
Where is new money going to come from? There are pre-election commitments not to raise taxation but rather to reduce income tax.
They are foolish commitments, but that’s politics. In the absence of new taxation, increased government revenue has to come from higher economic growth.
There is space for improvement in existing economic activity by making it more efficient, particularly in the public sector. There is room for new activity and the new government will have a priority task to promote substantial new direct investment. It is easy to identify that need. Far less easy, though, to prescribe how to achieve the required remedy.
The elephant, call it mammoth, in the financial sector is the public debt. At over €5 billion and 75 per cent of GDP (excluding the guarantees to Enemalta), it is already massive. And it is subject to a worrying catch. So long as there is a fiscal deficit, if only of one dirty cent, the public debt will continue to grow in absolute terms.
If nominal GDP (that is before adjusting for inflation) grows faster than the public debt, its ratio to GDP will fall. But it will not fall in absolute terms. For that to happen, there has to be a run of substantial fiscal surpluses.
That is unlikely to take place unless Malta strikes oil or gas, or happily both. Expect, therefore, the servicing needs of the public debt, the interest that has to be paid out on it, to increase.
The fact that public borrowing is very largely financed from within Malta itself, and that there remains liquidity in the economy to finance future increments in the debt, is reassuring. It does not, though, remove the burden on the Treasury, or reduce it. To reiterate, the burden will continue to grow.
The new government has its work cut out to meet the existing and upcoming economic and social challenges. It will also have to operate in a context whereby external pressures carry their particular threats. The eurozone, which fuels economic activity in Malta to a very considerable extent, is in deepening recession. Its very existence is threatened by what is going on in Italy.
It is easy to be complacent and say that we have so far survived eurozone crises. It would also be very foolish, taking into account our economic structure as barely outlined above.
In wars of old, they used to say, ‘To the victor, the spoils’. Once the celebrations are over, the new government would be wise to understand that, aside from the scintillating aura of power, there are no spoils to speak of.
If the new government has not exactly inherited a poisoned chalice, neither has it found waiting for it a barrel of fine wine.