The economic context in which the 2011 Budget was conceived called for a sober assessment of how best to proceed to help the Maltese economy grow and generate jobs, to promote private investment, to minimise inflation and to address both short and long-term weaknesses in our public finances.
In the last decade, we have seen our employment rate only improve slightly and we are still in the bottom of the employment league in the EU. Productivity is falling in most sectors and our GDP per capita is falling behind the EU average. Private sector investment as a proportion of GDP – the seed of future economic prosperity – fell since 2000 and is among the lowest in the EU.
Our inflation rate is often persistently higher than the average in the eurozone area, thereby threatening our competitiveness. Our public finances, while showing good signs of improvement in the short-term, are, according to the EC Sustainability Report of 2009, putting Malta in the short list of “high long-term risk countries”.
The Minister of Finance has often highlighted these issues and it was refreshing to read a candid assessment of these challenges facing the Maltese economy in the pre-Budget document. Now that the minister has delivered his Budget speech in Parliament, the freshness of the discussion on these issues is less evident. Maybe one should have lower expectations for substance on Budget Day that many consider as mainly a political marketing occasion conducted in the glare of the media spotlights.
The main theme of the 2011 Budget was the generation of employment and the enhancement of social welfare. A long list of measures was announced. There is no doubt that most of these measures will do the economy no harm and could make a modest contribution to raising the morale of hard pressed families who have been weathering the storm of economic turmoil with stoical virtue. But whether these issues will indeed address the medium to long-term challenges that our economy is facing is quite another matter.
I quote from the latest edition of the online edition of The Economist on the best practice for dealing with budget deficits: “Sensible budget repairs should be less about short-term deficit slashing and more about lasting fiscal reforms, from reforming pensions to trimming healthcare costs.” On could add to this the reform of our social welfare system and the financing of our educational system to make them viable, equitable and sustainable. The often repeated claim by the government that Malta has weathered the economic downturn much better than other countries and that because of this we do not need to introduce austerity measures, gives rise to a sense of complacency that prevents us from tackling the debilitating issues in our economy with urgency and determination. The cruel reality is that no country can simply grow out of looming pension, healthcare, social welfare and educational financing commitments.
To be fair, the minister did appeal to everyone to be prudent in their expectations on what can be achieved in the current difficult economic environment. What I found lacking is a sufficiently ambitious plan to cut public expenditure in a way that will make a real difference to our public finances in the medium to long-term.
Just one example: our public service employs 30 per cent of the workforce while in France, which has a large public service, only 19 per cent of workers are employed in this sector. While agreeing that reducing the civil service in a significant way in the short-term is hardly politically feasible, one would have expected a more determined effort to improve efficiency by more than the two per cent target set by the government.
Little was said on the reactivation of the pensions’ reform. The pre-Budget document stated that in August 2008 the Pensions Working Group was reactivated to propose the next steps in the introduction of the second and third pillar of the pensions’ scheme. After more than two years the report is still not completed. Who knows when we will see some action on this front?
Similarly, little new was said on how the government will tackle falling productivity, low educational achievement and insufficient private investment. An objective clinical assessment of why, after 10 years since the beginning of the Millennium, we are still among the worst underperformers in education in the EU would have been more convincing than committing more money to build new primary schools when the student population is falling.
A similarly candid review of the internal and external risks that threaten our economic growth in 2011 and beyond would also have enriched this important occasion in our business calendar. With many EU countries that buy our products and services facing the risk of a double dip recession, what are the government’s plan to cater for unexpected downturns in our tourism and manufacturing sector?
It is more than legitimate to celebrate our success in 2010, as long as this strengthens our resolve to tackle with urgency the structural weaknesses that threaten our future prosperity. Our good intentions for the future of our economy need to be underpinned with a steely resolve to define, plan and implement the changes that transform good intentions to real achievements.