In an official statement issued on Thursday, the Malta Federation of Industry said the Budget for 2008 would contribute to the reaping of the economic and social benefits that Malta can expect as a result of its membership in the EU.

In this respect, economic policy in Malta is guided by the attainment of Lisbon Agenda objectives and the compliance with the Stability and Growth Pact. Underpinning these is the need to increase the per capita income level in Malta, which is around 70 per cent of the EU average. This can only be achieved through the enhancement of competitiveness based on the promotion of value-adding and innovative activities.

The FOI considered the measures announced in the 2008 Budget to be consistent with three primary objectives:

• The pursuit of macroeconomic stability through a continued reduction in the fiscal deficit and debt-to-GDP ratio with a view to achieving Budget balance by 2010;

• The promotion of programmes and initiatives aimed at increasing the productive capacity of the economy, most notably those related to industry, tourism, film industry, education and labour market activation;

• An increase in household disposable income.

As regards macroeconomic stability, the FOI stated that the importance of the reduction in the fiscal deficit and the attainment of Budget balance arise from the following issues:

• It enables Malta's adoption of the euro, which is essential to enjoy the full benefits of EU membership, as well as its sustainable participation in the Eurozone;

• It creates a buffer of fiscal resources that would allow Government to undertake expansionary measures in periods of lean demand;

• If accompanied by a reduced tax burden on economic activity, it indicates an improved efficiency in the use of resources within the public sector.

Furthermore, the Federation noted that it has long been calling for these orientations in fiscal policy and is satisfied that they are being implemented with a degree of success, with the fiscal deficit expected to be 2.1% of GDP in 2007 and 1.2% in 2008. The Federation would, however, also like to point out that the long-standing problems of underemployment and bureaucratic and regulatory inefficiencies in the public sector persist, and are impinging negatively on the country's competitiveness.

On 'Initiatives and Programmes towards increased Productive Capacity', the Federation stressed that the enhancement of the economy's productive capacity through increasing available resources, improving productivity and focusing on innovation and value added is the only viable path to sustained, long-term growth. It is also the only genuinely effective defence from the effects of adverse exogenous shocks that hit the economy from time to time, at present taking mainly the form of higher energy and food prices.

The FOI is satisfied that a number of measures have been announced in the 2008 Budget that are in this direction, primarily:

• The allocation of resources to industrial and innovation policies through the new Malta Enterprise Act, amounting to around 0.8% of GDP;

• The investment in industrial zones, amounting to around 0.6% of GDP;

• The allocation of resources to improve the country's tourism offer, of roughly a similar magnitude;

• The investment of resources in education, amounting to around 4.7% of GDP;

• Measures to enhance labour market participation, particularly for older workers and within the context of a better reconciliation between family and work life, absorbing around 0.1% of GDP.

The FOI is also satisfied that its proposal for a scheme to support the undertaking of energy audits in industry, and to reduce the payback period for the implementation of audit-recommended measures, has also been incorporated in the Budget for 2008. The FOI hopes that the resources devoted to this scheme, which will mainly originate from EU sources, will be sufficient to make a material impact on energy costs and competitiveness. Crucial to the success of these initiatives will be the efficiency and effectiveness with which they are actually implemented.

However, the FOI noted that a number of measures that it had suggested in the pre-Budget consultation phase aimed at lowering energy costs to industry and the rest of the economy by introducing incentives for a more rational utilisation of resources were not taken up. The need for these measures is likely to become more pronounced in the coming months with the ongoing increase in international price of oil.

They included the introduction of double tariff rates for electricity to distinguish between day and night use, at least initially for heavy consumers; a review of the system of maximum demand metering in industry to take into account unintended and exceptional peaks in energy use, particularly following power outages; and the improvement of public transport efficiency, including the implementation of measures to increase competition in the market.

In the context of the promotion of competitiveness, the FOI pointed out that the system of Cost of Living Adjustment (COLA), as it has been operated since its inception, and as has been used in the Budget for 2008, is not conducive to competitiveness, as it is not linked to productivity. The anticipation of Lm1 in the weekly COLA adjustment is by no means a solution for the country to meet the effects of higher imported prices. It is merely a palliative, involving a temporary transfer of resources from employers to employees. On this issue, the FOI reiterates the need for the resumption of social dialogue, at MCESD level, with the appropriate technical backing, with the final aim of rendering the COLA applicable solely to non-unionised workers and those earning a minimum wage.

It is to be understood that the wage level is an instrument to promote work, whose level must be consistent with the financial viability of the enterprise and with the provision of a sufficient reward for the skills, abilities and productivity of workers. It is therefore not an instrument of poverty alleviation or social equitability. The latter are to be sought in appropriate welfare programmes rather than through tinkering with the wage-setting mechanism.

On the 'Increase in Household Disposable Income", the FOI stated that it is satisfied that the Budget for 2008 would provide a substantial increase, estimated to average around 2.7%, in the wage income of households, involving a mobilisation of resources of around 1.1% of GDP. This involves several measures, including the alleviation of personal income taxation through an adjustment in the tax bands as well as the revision in the children's allowance.

It may be argued that part of these resources could have been better employed in directly stimulating productive activities. Aside from this, the FOI augurs that these measures do not serve merely to stimulate demand but also to encourage households to work more, and work better. The adjustment in income tax bands should serve to stimulate more work and skills improvement to attain higher income levels.

The revision in child benefits, providing for a minimum level irrespective of income earned, should remove part of the disincentives for a spouse to work. It is also to be considered that with the increase in household disposable income effected through the budgetary measures, there is a strong case for wage moderation in the economy to allow for a genuine improvement in the country's cost competitiveness and income generation capabilities. This argument is further reinforced by the difficulties posed by changes in international prices, whose effects are not limited to households but extend to industrial input costs as well.

The FOI further noted that a number of measures in the field of social policy are targeted to specific vulnerable population sectors rather than being universal and broad-based and that they do not distort incentives to work.

With respect to tax alleviation measures, the FOI considers that the introduction of favourable tax treatment on voluntary pension contributions and similar saving schemes would have abetted national saving and facilitated the long-term reform of the pension system.

Noting the alleviation of tax burdens with respect to the transfer of real estate for residential purposes within families, the Federation hopes that similar measures will be introduced for business assets to ensure the unhampered continuity of business undertakings.

The FOI highlighted areas that it considered to be policy priorities for implementation and which are, to varying extents, encompassed by the measures proposed in the Budget for 2008.

These are the allocation of sufficient resources for the effective activation of the National Vocational Qualification Framework and the strengthening of student apprenticeships and placements in industry; the implementation of measures under industrial and innovation policies that are geared not only to the needs of "new economy" activities but also to enhancing the competitiveness of more traditional activities; and the pursuit of efficiency in public sector operations and of business-friendly regulatory approaches.