“De gustibus non est disputandum.” So apt for describing budget week in Malta. With everyone having different expectations and with people generally adopting a myopic approach, any budget that any government presents risks being the victim of a superficial analysis anchored around key leading indicators or measures. However, there is much more to a budget than that.
The budget is not just an accounting exercise whereby government projects its revenues and expenditures. It is an economic policy tool that allows governments to allocate resources within a financial constraint.
It allows the government to correct market failures and more importantly to direct present resources to future growth. Therefore, any analysis of a government budget must be done in this multidimensional light.
The following is definitely not an exhaustive analysis of the budget presented last Monday but it seeks to shed more light on various challenges that the government needs to address.
The economy at present
Our starting point needs to necessarily be Malta’s current economic performance. Over the past year, Malta has consistently registered a robust performance with headline figures for GDP, unemployment and employment growth being among the best performers in the euro area and broader EU.
Growth has been propelled by a number of sectors, primarily remote gaming, financial services, tourism and other corporate activities. These have roughly contributed directly to 60% of Malta’s gross value added.
Real estate activity has outpaced the contribution of manufacturing while the public administration contributed 14 per cent of gross value added. The remainder was primarily driven by growth in taxation revenues, primarily corporate, on account of the improved economic activity and general attractiveness of the Maltese jurisdiction.
While economic growth, as measured by GDP, is not an end in itself, it remains a precondition for enhancing human welfare.
It provides the resources necessary for improving health, education and security. It is therefore important for countries to monitor closely the factors that determine competitiveness, while keeping an eye on the wider societal goals and related trade-offs.
On the employment front, the unemployment rate stood at 4.2 per cent in August 2017 compared to 7.6 per cent in the euro area, and employment growth stood at 4.7 per cent in the first quarter of this year compared to 1.6 per cent in the euro area. Government debt as a percentage of GDP fell below the 60 per cent mark while the general government balance registered a surplus.
This is by far not a structural analysis of the economy and therefore does not delve into the main drivers of growth, employment and government finance.
It would be interesting to see the effect of temporary inward flows on value added and government revenues, particularly from the citizenship scheme, in order to assess the structural position of such economic trends. However, on the basis of these key indicators, one can conclude that the economic performance is buoyant.
The challenge is not only sustaining such performance but directing resources to address various challenges that Malta’s economy faces.
The challenges
The positive economic performance does not warrant complacency. On the contrary, it requires us to remain even more vigilant to any structural weaknesses and invites us to be even more innovative to ensure that our competitive advantage does not wither away. The Maltese economy faces a number of key challenges, however I will be focusing on what I believe are the most pressing.
Correction of market failures: In economics, a market failure arises when the allocation of goods and services is not efficient. There are times when the free market creates too much or too little and this calls for government intervention. In Malta, a number of market failures are happening and include but are not limited to traffic, social housing, waste and the general environment.
A study by the University of Malta has estimated that the external cost of traffic congestion is over €270 million per year.
Although the Budget presented some initiatives, the challenge ahead of us requires an ambitious plan that includes both supply-side and demand-management policies.
More reforms, policies and investments are needed to ensure a sustainable growth path for Malta and its people
In the case of social housing there is a supply gap which is being catered for by planned investment in this area.
As a small island, Malta has a limited capacity to deal with waste and the introduction of reverse vending technology together with waste incineration should contribute to improving the management of waste.
Finally, given Malta’s physical constraints, the environment we live in is under constant threat and its degradation will also erode our quality of life. More environmental projects need to be seen especially those that protect the so-called ‘green-lungs’ in our towns and villages.
Market failures have also been identified in access to financing for SMEs.
The Malta Development Bank should become an important player in this area, however one hopes that the government will be able to launch more EU-funded investment schemes for our SMEs. The extension in the MicroInvest schemes is definitely a welcome initiative.
Human resources: Labour shortages are happening across a number of industries and the influx of economic migrants has supported economic growth. However, our capacity to continue providing skilled human resources will determine our ability to continue attracting investment to our island. Established industries are already feeling the scarcity of our current resource pool and this will only lead to wage pressures eroding our competitiveness.
In addition, the new disruptive sectors require very specialised human talent which might be a limiting factor.
The postgraduate scheme is a welcome initiative but it is crucial that the government aligns such schemes with what the industry really requires so as to minimise skill gaps. Also, as the construction industry sees a strong upturn, its demand for workers is outstripping the current supply with the industry looking outward to import more labour.
The government needs to tackle the labour market with utmost urgency and together with it, the educational set-up needs to be examined to ensure that it is creating a steady flow of skilled workers. More effort needs to be made to reduce the early school leaving rate as well as the proportion of students continuing tertiary education.
General infrastructure: Malta’s property boom together with record-breaking tourist arrivals are causing a strain on the island’s infrastructural capacity. In fact, this has been listed by the World Economic Forum as the third most problematic factor for doing business in Malta.
The government has embarked on a road-building programme together with other areas of infrastructural improvement including waste management and health.
However, a broader programme of infrastructural investment and development is needed, looking at improving the general feel of the island and the experience of residents and visitors on a daily basis.
The capacity to innovate: Although not apparent, Malta has thrived on its ability to be innovative throughout the years. Unfortunately, our understanding of innovation rests solely with technological progress and advancements. However, successive Maltese governments have been highly innovative in using our legislation to enhance our investment attractiveness. From our tax system, to remote gaming, to pharmaceutical patent legislation to maritime and aircraft registration regimes, Malta has established itself as a reputable innovative jurisdiction.
Still, the pressure lies on us to continue being ahead of the game.
The newly announced gaming regime, national interest deductions and the establishment of a blockchain cluster are all positive developments. However, more is needed to ensure that our growth patterns can persist into the future.
The current economic performance is buoyant but challenges are many. The government needs to ensure that growth is more inclusive and broad-based while sowing the seeds for tomorrow’s industries and capacity to grow.
The Budget is just one tool at the government’s disposal to achieve its goals and the Budget for 2018 is a step in this direction. However, there is no room for complacency.
More reforms, policies and investments are needed to ensure a sustainable growth path for Malta and its people. In the coming years, the government needs to continue pursuing the right mix of policies, strategies and reforms for this to materialise.
Jean Paul Fabri is an economist and visiting assistant lecturer at the University of Malta.