The goal of Budget 2010 is to stimulate Malta's economic growth by incentivising productive investment and job creation. To this end, the Budget proposes an economic stimulus package of €80 million in incentives that favour job creation and economic development, €228 million in infrastructure and €1.3 billion in health, education and social protection.
This article provides a high-level analysis of the possible implications of the weekly cost of living adjustment (COLA) and some of the other measures announced in Monday's Budget speech. It does not address the impact of inflation (which is forecast at two per cent for 2010), however, and the new water and electricity tariffs (expected to be revised as from January 1).
The COLA will invariably impact local businesses. However, the scale of the impact will vary on the basis of different revenue and operating cost structures. This article takes a snap shot of companies in four areas: manufacturing, tourism, retail and transport services, chosen because of their pivotal role in the Maltese economy.
Manufacturing
Manufacturing is important not only because of its output but because of the amount of people it employs. It accounted for €334.8 million, or 14 per cent, of gross value added to the economy in the first six months of 2009 and as at the end of June 2009 employed 20,756 people. It is highly capital and labour intensive and given the high export focus, it is largely exposed to international competitive forces. This implies that companies in this segment have less room to manoeuvre than other industries to adjust their prices.
The table above sets out the cost structure for the manufacturing industry based on data collated from NSO publications and Economic Survey 2009. The analysis indicates that industry wide value added in 2006-08 averaged circa 33 per cent of turnover, which implies that 67 per cent of total revenue is absorbed by costs (predominantly raw materials) over which the companies in question have limited control. Payroll costs represent 58 per cent of total operating costs and 37 per cent of value added. As a result of these dynamics, manufacturing operations are substantially susceptible to any increases in their operating cost base.
Assuming a hypothetical manufacturing company with an annual turnover of €50 million and (based on the average weekly sales per employee achieved in January-June 2009 of €2,054) employing 468 employees, the COLA increase of €5.82 will result in additional annual payroll costs of €156,000, equivalent to a 2.1 per cent increase on the company's current payroll bill of €7.5 million per annum (based on the industry average of 15 per cent for wages as a percentage of turnover registered in January-June 2009).
The Budget proposed a number of measures geared towards incentivising productive investment by existing manufacturing companies including:
• The allocation of an additional €7 million to the €20 million for industry allocated to International Competitiveness, Innovation, Research and Innovation and E-business;
• Renewal (and the widening of the qualifying criteria) of the 2005 Reinvestment Tax Credit (Income Tax) Rules, which provides for tax credits on re-invested profits for projects approved by Malta Enterprise;
• Introduction of incentives to encourage foreign investors (already operating in Malta) to shift vertical activities to their existing operations in Malta;
• Allocation of €2.5 million in a Reserve Fund for assisting enterprises with temporary difficulties;
• Refund of 15.2 per cent on expenses (on which tax has been paid) on research projects approved by the Ministry of Finance and the Malta Council for Science and Technology.
Tourism
Tourism is the leading services activity in terms of employment and is a key foreign currency earner. Employment in this sector corresponds to 6.8 per cent of the gainfully occupied population in June 2009 amounting to approximately 10,000 employees. In January to June 2009, gross earnings from tourism accounted for 12.1 per cent of exports of goods and services.
The sector is inherently subject to different external influences. The international economic and financial crisis has had a negative impact on tourism activity worldwide and Malta has been no exception. Tourist departures between January and September 2009 stood at 936,342, a decrease of 10.4 per cent over the same period in 2008. As a result, full-time employment in hotels and restaurants declined by 462 jobs to 9,918 by the end of June 2009.
In the Budget, the government announced a number of initiatives targeting this industry. A total of €31 million is being allocated to the Malta Tourism Authority, including a special package of between €3 million and €5 million to support companies in difficulty. The government has pledged to increase accessibility to Malta through new airline routes; enhanced marketing in Malta's principal markets; and the targeting of new markets such as the Middle East. The Budget also extended assistance scheme to hotels, which increase their advertising from 2009 by financing 50 per cent of the additional expenditure.
On the cost side, one of the main direct impacts will be the COLA increase. Assuming a hypothetical five-star hotel with 250 rooms employing 218 employees (based on the industry standard for five-star average staff to available room ratio), the COLA increase of €5.82 per week will result in additional annual payroll costs of €72,000. This is equivalent to a two per cent increase on the company's current payroll bill, which we estimate at €3.7 million (based on the five-star average payroll costs per available room in 2008) and three per cent of the current gross operating profit, which we estimate at €2.4 million (based on the five-star average gross operating profit per available room in 2008).
Service providers
The market services sector has been the main generator of jobs in recent years with a growth rate of 10.6 per cent between June 2005 and June 2009. In this period, employment in the wholesale and retail sectors increased by 4.3 per cent to 22,095 while that of the transport, storage and communication sector was relatively, stable.
Retail
The Retail sector is labour intensive and is highly exposed to local market forces, relating to people's consumption patterns. Budget measures such as the removal of levies on credit cards, direct financial assistance for families with respect to energy costs, an income tax exemption for self-employed working mothers and a full cost of living increase to pensioners will increase consumers' disposable income. In turn, this might benefit the retail sector should this be translated into higher consumer spending.
To quantify the potential impact of the COLA, we assume a large supermarket generating annual turnover of €15 million and employing 82 employees (based on assumed weekly sales per employee of €3,500). The COLA increase of €5.82 per week would result in additional annual payroll costs of €27,000. This is equivalent to an increase of 3.3 per cent on the current payroll bill, which we estimate at €0.82 million per annum (assuming an average payroll cost of €10,000 per employee).
Freight Services
The freight services sector is both capital and labour intensive and is highly exposed to changes in import and export activity. During the first nine months of 2009, the value of imports decreased by 20.8 per cent, while the value of exports also decreased by 22.6 per cent. This is likely to have significantly affected the operating performance of companies in this segment.
The Budget announced a reform in the registration tax and licensing of the commercial vehicle sector. Newly acquired commercial vehicles that have Euro 4 or Euro 5 (low emission) engines will be exempt from registration tax. Furthermore, the annual licensing fees payable on these commercial vehicles will be reduced in the first nine years. These reforms will result in a substantial reduction in the acquisition and running costs of commercial vehicles and should incentivise companies in this segment to renew their fleet.
Assuming a hypothetical freight services company employing 30 employees with an average payroll cost of €15,000 per employee, the COLA of €5.82 would result in additional annual payroll costs of €10,000, equivalent to a 2.2 per cent increase on current costs. Should this cost increase be transferred to the consumer through tariff adjustments, it is likely to have a multiplier effect on the cost of industries dependent on transport services, in particular manufacturing and retail.
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