Malta is passing through a boom and the major challenges are to keep the economy from overheating and to manage sustained growth. The main question is: we are skating smoothly on the ice, but how thick is the ice? Is this level of growth sustainable in the medium to long term?
The Budget needs to proactively address some major fault lines underlying our economy, namely:
■ That our economy will probably not be eligible to further EU structural funding post 2020.
■ The possibility that the tax incentives critical in attracting financial services and gaming sectors will be removed or toned down.
■ Maintaining positive tourism figures once there is more stability in the Mediterranean region.
■ Increasing Malta’s economic output capacity.
■ Reconciling economic growth with objectives related to environmental constraints and quality of life. Ensuring that Malta’s reputation of good governance does not deteriorate.
■ The drop in national revenue once the gold rush from the sale of Maltese citizenship subsides.
■ Ensuring that the banking sector continues to be in a position to service international business.
The current positive macroeconomic indicators may be hiding these fault lines thereby increasing expectations from the general population.
The heading of the pre-budget document, Prosperity with Social Justice, addresses an important concept linked to economic growth – distribution of wealth. This concern is generally being raised due to the following factors:
The disparity in gross value added between different sectors is leading to widening wage differentials between sectors.
There are vulnerable groups that may be experiencing a decline in their purchasing power. Two main segments that fall in this category, which have been identified by the Caritas Report, are pensioners and single parent families.
It would be a mistake on the government’s part to meddle with the operation of the labour market and collective bargaining process
Rental costs are increasing due to higher demand by foreign workers and residents and are thus eroding the disposable income of persons and families who do not own their own homes.
Incidences of quick cash payouts irritate honest working people (e.g. the €80,000 payment to monti hawkers). Displays of ostentatious consumption by wealthy foreigners (and some local ones) increases the feeling of relative poverty, especially within the low income segment.
A two tier labour market: employees in the public sector (including parastatal companies) have guaranteed lifetime employment and guaranteed working conditions, as has happened at Enemalta and will probably occur at Air Malta. Employees in the private sector do not have such luxuries.
The knee-jerk reaction is to intervene with the wage determination mechanism, but a major reason why Malta managed to successfully weather the brunt of an international recession, and rebound with the current rate of economic growth, has been a strategy of wage moderation and responsible employment practices and job creation by the private sector. Some countries in the EU have higher wages than Malta, but they also have higher unemployment, meaning that a larger section of the working population is deprived of these higher wages, thus making them more emarginated and unable to access the labour market. In principle, the Malta Employers’ Association has advocated policies that minimise the number of persons on low wages rather than raising wages artificially.
Vulnerable groups, such as pensioners and single parent families should be assisted through focused social interventions. Home ownership and long-term savings should be encouraged and incentivised.
The MEA is in no way advocating a freeze in wages and salaries, but any increases should reflect corresponding changes in productivity and competitiveness of our industries. It would be a mistake on the government’s part to meddle with the operation of the labour market and collective bargaining process. There is no question that wage inflation is currently a reality, even in low skilled jobs. This is a result of labour shortages in various sectors of the economy, as well as the creation of more high value added jobs by the private sector.
On the one hand, the government has been successful in increasing the supply of labour through a set of active labour market policies and curbing abuse of the welfare system. Yet the increase in public sector employment is also a drain on human resources which would be better employed in the private sector. Many companies report of employees who resign to take up jobs in the public sector, which may not be productive in all cases. For example, employers in manufacturing and tourism sectors in Gozo have been particularly affected by resignations from within their labour force to take up jobs in the public sector.
The increased population resulting from the foreign labour force – estimated to exceed 30,000 in 2016 – is contributing to domestic demand, but also exerting pressure in terms of increased rental costs, traffic generation and pressure on educational and health infrastructure, among others.
In a country with limited resources and output capacity, we have to make choices as a society, as some activities may interfere or even disrupt others.
The major future challenge may well be one not of utilising existing resources to full capacity, but rather of how to establish the best mix of economic activities to maximise sustainable economic performance together with environmental and quality of life considerations. In the same way that 10 years ago we had to restructure the economy because of circumstances forced upon us, we will have to take important decisions which can well mean the deliberate phasing out or reduction of activities which yield a low return or which have an adverse effect on our society’s quality of life.
Joe Farrugia is the director general of the Malta Employers’ Association.