Prime Minister Joseph Muscat has a crowded agenda. In the first comments he gave to the press after being sworn in, he mentioned the approval of the Budget and the energy plan as two of the first priorities of the Government, with a string of pending legislation and other laws promised by the Labour Party.
Ministers should prepare a zero-sum budget reversing the traditional work process budgeting of government
He didn’t mention the economy but I am sure that soon enough he will realise that he needs to give it his utmost attention. The latest figures about the GDP released by the National Statistic Office show why.
In the fourth quarter of 2012, real GDP growth slowed down by more than half a percentage point to an annual 1.1 per cent, making overall growth in 2012 a meagre 0.8 per cent. Sure, that’s miles ahead of the record in the EU27 and eurozone, where GDP fell by 0.3 per cent and 0.6 per cent respectively. But that is scant consolation.
The fact is that absolute GDP growth has slowed down from 2.9 per cent in 2010 and 1.7 per cent in 2011. It is all well and good to gloat about how well we are doing compared to the EU average but you cannot put substitute percentage comparisons for actual money in people’s pockets.
We need to look at the pacesetters rather than at laggards. The Baltic States had comparatively roaring 3.5-5.5 per cent annual growth rates last year and Poland and Slovakia also did nicely.
Real GDP growth last year was driven by exports with a 5.2 per cent growth, even though that and increased consumption expenditure sucked in more imports, which rose by 4.4 per cent. It is clear the new Labour Government needs to put wealth generation at the top of its economic agenda.
Even if the favourable trade balance only contributed five per cent to overall real GDP, it remains crucial to economic growth.
The PL has promised to put more money into people’s pockets. Considering that just over 84 per cent of the GDP is generated by consumption expenditure that would help. Unfortunately, the Nationalist Government had opted to reduce taxes for the more well-off and it is common knowledge in economics that, more often than not, what the better-off will are likely to do is to put their reduced tax bills into savings. It is the less well-off who normally tend to spend more.
Muscat is right not to overhaul this year’s Budget. That would surely take many weeks and would create uncertainty on top of a creaking administration. He and his Minister of Finance will have three months less than normal to prepare next year’s Budget. But they cannot afford to take their eyes off the ball. The incentives to enterprise and other measures that favour economic growth, including incentives for higher labour market participation, need to be fast tracked.
A worrying aspect of last year’s trend in the Gross National Income was that compensation of employees took 101.7 per cent of the increase in GNI, compared with just 59 per cent of the increase taken up by the gross operating surplus of enterprises and 3.4 per cent by taxes. I do not begrudge employees for their hard-won earnings but the healthy profitability of business enterprises is a lynchpin of wealth creation because higher investment will only follow the profit trail.
It is also worrying that net income receivable from the rest of the world impacted the increase in GNI by a negative 64 per cent.
The real GDP growth in 2012 was 34 per cent worse than the Nationalist Government’s projection as presented in the Budget Speech. That didn’t surprise economic analysts who were watching closely other economic indicators, such as consumption figures, trade statistics and industrial and service indicators. After all, the PN Government overestimated economic growth by 30 per cent in the past five years. The Nationalist Government did not bequeath a shambles of an economy but there were worrying flashing signals. The Labour Government has restricted room for manoeuvre being limited by high public debt and the need to keep the fiscal deficit under control, if not improve it. So, thank God that Labour, contrary to what the Nationalist Party claimed, did not promise everything to everyone but, instead, proposed a more modestly-costed programme.
The challenge for the Labour Government will be how to find the money to stimulate economic growth and take it to a permanently higher plateau without busting the Budget. In my opinion, that can only be achieved by redirecting government expenditure away from recurrent outlay that is non-productive and focus on productive investment and capital expenditure.
If I were Prime Minister, I would ask all ministers to do what private businesses do from time to time: prepare a zero-sum budget that reverses the traditional work process budgeting of governments. What we have at the moment is that the baselines are taken as a datum and ministers vie for the changes in the increments, fighting for increases at the expense of other ministers.
Muscat needs to turn that on its head and ask each and every minister to justify every line item of the budget. That will surely expose the waste and gross inefficiency in government operations and release the money needed to up the secular economic growth rate. Some EU governments have done this through spending reviews.
It was good to hear Muscat say that he has already spoken to the British Prime Minister about the EU’s economic agenda and his efforts to promote a better balance between austerity and economic growth will surely complement those of President François Hollande in France and outgoing Prime Minister Mario Monti in Italy.
A greater concurrence on this among European leaders would help but, to be honest, I wouldn’t count on it too much in the short term given Chancellor Angela Merkel’s electoral exigencies.