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Spring for the economy?

It is little wonder that the Prime Minister immediately welcomed the European Commission’s spring economic forecast for Malta on Monday. The report endorsed the data on economic performance during 2013 and the official forecast for the current year. It described both as robust and looks to continued positive outcomes, other things remaining equal.

The Prime Minister, even if he did not have the forthcoming European Parliament elections in his sights, naturally took the report as confirmation of what the government has been saying. And so it is. The document included such caveats as the European technical people felt they had to make, and moved on to tick off the positive results one by one.

Economic growth in 2013 was quite satisfactory, even though exports declined. Domestic consumption more than made up for the contraction in sales abroad, mainly due to the electronics sector. It also welcomed with some underlying surprise the fact that the fiscal deficit had fallen below 3 per cent.

The report sees both variables as remaining on track in 2014 and 2015. It sees inflation as set to deviate from trend and rise somewhat this year, but it should drop again in 2015.

The report takes due note of the government’s measures to reduce energy bills, though it does not refer to the cut in commercial tariffs scheduled for next year. It notes that various projects are in the pipeline which should strengthen the government finances, including the individual investment scheme.

One has to look beyond political reaction to the report and dig more deeply into what it touches upon. The other-things-remaining-equal condition is, as always, very important. They will not remain equal, as the report observes, if the plans to invest to buy energy at lower costs are delayed.

The future is always hazy. The report takes the government’s macro forecasts as given, but does not swallow them whole. One shall be able to analyse them better as time passes and the future becomes a progressive reality.

Needless to say, I too welomed the spring assessment. Expert eyes dissecting us from abroad give a more objective result than what we hear and say in Malta, frequently regurgitating the news as if it were difficult to digest the first time around. Yet while welcoming the report, I felt troubled by the fact that the impetus to growth in our GDP came from domestic consumption, and that exports fell. Consumption, of course, is a key component in the composition of the GDP. The fact that it is growing translates into a statement that we are experiencing better living standards.

I felt troubled by the fact that the impetus to growth in our GDP came from domestic consumption, and that exports fell

If consumption falls that could be a sign that disposable income is in decline, or that consumers have started to view the future with apprehension.

That is not the case. While real wages have not been rising on a unit basis, there has been a sharp increase in the gainfully occupied population, meaning that spending power has risen. That boosted economic growth and should do so again this year and as the government’s measures to help those at the margin of povery and low-income earners are rolled out, among other things.

Such measures, aside from their welcome social effect, will also have an economic effect. More income in the hands of the marginal or threatened poor and other low-income earners will translate almost completely into increased consumpion. Domestic economic activity will rise.

My point is that, as consumption rises, so will imports. That has to happen, our standard of living needs to be sustained with purchases from abroad. But the income to lubricate such purchases needs to be generated largely from abroad, boosting tax revenue to enable the government to finance its increases.

To my mind while a feel-good factor is essential in the social economy, more attention needs to be paid to investment in export-oriented activities and to exports.

Government handouts are all well and good, especially when they are driven by a commitment to social justice and help to lift the lower income groups up the economic scale. But these handouts have to be financed. They themselves generate higher tax revenue, especially if the VAT regime is enforced more stringently than at present. Further revenue had best come from net export activities.

The vicious circle of more imports-more-foreign-currency-leakages has to be transformed into a virtuous circle of more-exports-mean-more-income to finance essential imports, both for productive investment and for consumption.

Spring is going well for the government and for the economy. It also lights hope in the hearts of low-income beneficiaries of the measures to be rolled out gradually by the government. It is important that the whole year does well with more attention given to new investment and to exports. Even if much is being done, it can never be enough.

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