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No party at South Street

With the country’s purse strings tightly in his hands, Finance Minister Edward Scicluna tells Kurt Sansone he will do anything it takes to keep expenditure in check while juggling with unforeseen circumstances.

As the economy outstrips the EU average and grows by 3.5 per cent in the first three months, Edward Scicluna feels he has reason to be pleased.

Since the election, Malta’s economy has maintained a steady course even as Europe, Malta’s largest trade partner, struggles to emerge from the doldrums.

But there is no party down at South Street when I meet the Finance Minister on Friday afternoon at the ministry.

He immediately injects a dose of realism into the numbers released last week by the National Statistics Office.

GDP growth is calculated as a percentage difference with quarterly figures compared to the same quarter of the previous year.

Prof. Scicluna notes that the economy had slowed down in the first three months of last year as a result of the impending election. Investment and consumption naturally slowed down, and so the pre-election blues may have contributed to this year’s figure appearing much bigger, he adds.

His estimate, if the election factor is pulled out of the equation, is that the economy grew by some 2.5 per cent in real terms in the first quarter of this year.

“The results are encouraging and show an economy that is growing at a steady pace but it is not the time to shout hoorah,” he says.

But the sober analysis is punctured with satisfaction at the upturn in construction, which he says is significant.

Construction took a pummelling after the boom peaked in 2007 when the sector was awash with investment as many turned Maltese lira into stone ahead of the currency change to euro in January 2008.

Construction is not necessarily bad and has a multiplier effect on other sectors of the economy

It all burst in 2008 and the sector has been in constant decline since then, registering an upturn for the first time this year.

“Construction is not necessarily bad and has a multiplier effect on other sectors of the economy,” Prof. Scicluna says, when I ask what is so special about a sector often blamed for this country’s environmental ills.

“This shows that pessimism in the sector has stopped and optimism has taken over,” he adds.

The overall picture was, however, dented by a different set of statistics released by the NSO last week that showed industrial turnover in the first three months dropping by 8.8 per cent when compared to last year.

The decline does not bode well for manufacturing, which is a mainstay of the economy, but Prof. Scicluna insists this is not cause for worry. He says the performance of ST, a microchip maker, is partly to blame for the result, including a drop in exports.

ST is a giant in the manufacturing sector, and like all finance ministers before him, Prof. Scicluna argues that if the company is pulled out of the equation the rest of the sector is stable.

“We have been informed that ST’s dip is cyclical but I would be worried if the EU was growing and the demand for Maltese exports dropped. If this happened we would have competitiveness issues but this is not the case.”

Another measurement of economic wellbeing is employment. This is one set of figures that has kept the government on edge over the past year as registered unemployment increased.

The latest Employment and Training Corporation figures show that in April there were 7,291 people seeking work, a decrease of almost 400 when compared to the previous month but still higher when compared with April last year.

It seems as though not enough new jobs have been created to fulfil the demand, which has led to higher unemployment figures.

But Prof. Scicluna points his finger in another direction. The unemployment rate, the number of jobless worked out as a percentage of the workforce, has been dropping since January, he says.

“It is not a question of supply and de­mand but rather whether job seekers have the right qualifications that industry is asking for,” he says, adding that the economy is creating more and different jobs.

He gives the example of service companies that employ people because of their language skills.

“It is OK to study Maltese because there is a market in translations in Luxembourg, but are our students informed on the possibilities offered by call centres and gaming companies that need people who can speak different languages?”

No discussion with a finance minister is complete without reference to the deficit – the ominous word that has dominated the political landscape ever since Malta adopted the euro and bound itself to reduce the fiscal imbalance below three per cent of GDP.

Last year the deficit was cut to 2.7 per cent and the government is targeting a further reduction to 2.1 per cent this year. However, with government finance data released by the NSO recently showing the deficit to have widened by €55 million in April, the red lights are on.

With revenue posting good returns, I ask the minister whether expenditure is running away.

He does not flinch and insists the government is on track to meet the Budget targets.

“We monitor the situation on a monthly basis and will do anything it takes to correct things as we go along,” he says.

‘Correct things’ is the politically correct way of saying cutting expenditure or re­directing it elsewhere, and Prof. Scicluna has no qualms admitting it.

He says ministries are expected to stick to budgetary estimates in their expenditure but admits unforeseen circumstances crop up that need immediate decisions.

“In some of the cases we ask the ministries to postpone the planned initiative to the next budgetary period but there are instances that involve sensitive areas such as health where money has to be found.”

Public transport is another sensitive area that could potentially give the minister some sleepless nights. After the Anglo-German company Arriva pulled out of the country, the bus service started being run by a government company.

It is the government’s intention to rope in another private investor to run the bus service but talks are still going on, and in the meantime the bill continues rising.

“A private contractor will bring in more efficiency and know-how. It is not government’s business to run a bus a service. We are holding the baby until it is adopted,” he says.

Prof. Scicluna explains that the government-run bus company has used up the subsidy for this year and additional provisions were made to cover the loss in revenue as a result of the removal of discriminatory pricing against foreign residents.

He shies away from putting a figure on the expenditure but insists public transport is an area where spending cannot be postponed.

“The transport problem was not our own making. We were lucky that we managed to negotiate the deal with Arriva that saw them absorb all the company’s debt; otherwise it could have been a different story.”

But this is of little consolation when the figure being floated as a potential subsidy to cover the improved routes is in the range of €40 million-a-year.

Can the country afford this money?

“There is no decision yet and negotiations are still going on with the bidders but I cannot give a guarantee that fares, routes and the level of subsidy will not change,” Prof. Scicluna says.

Is public transport another shipyard in the making? [The government-run shipyards had run up millions in debts before being privatised]

Prof. Scicluna shoots down the suggestion, insisting public transport cannot be compared with the shipyards.

Having an efficient and timely bus service is beneficial to the economy because it can help reduce traffic congestion, which has an impact on competitiveness, he says.

Turning to the European Commission’s country-specific recommendation to increase the pensionable age, Prof. Scicluna says Malta is still adopting the reform enacted some years ago that gradually increases the retirement age to 65.

He insists it makes no sense to speak of extending the retirement age further, more so when the country had the lowest labour force participation rate in Europe.

“There is still more potential to increase the number of workers, especially women, who will help pay for our retirees,” he says.

Prof. Scicluna says the government will be announcing two schemes this week to encourage people to save money for their retirement.

The schemes will give tax incentives to those who pay out premiums towards a private pension fund, with one of them allowing savers the possibility to withdraw money before retirement. He explains that the tax incentive targets new savers and will benefit those whose income is above the minimum wage and pay taxes.

The schemes form part of the third pillar pension, which was floated as part of the reform process years ago but never implemented. While serving as an incentive to those who can afford to pay for a private pension, the scheme leaves those on very low wages out in the wilderness.

Prof. Scicluna acknowledges the disparity this may create but insists the government had to take a decision.

“We could have bogged down in complicated mechanisms but we chose to move ahead.

“As we go along, other solutions have to be found for those who cannot afford a private pension and so will not benefit from supplementary income when they retire.”

ksansone@timesofmalta.com

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