At a time of significant economic growth, it is easy for political policymakers to harbour the illusion they have discovered the Midas touch that guarantees long-term economic prosperity. Economic analysts with their feet firmly on solid ground challenge this assumption. The key success factors underpinning a particular industry can change relatively suddenly, threatening the viability of such an industry.
The electronic gaming and financial services industries are the main contributors to Malta’s economic success in recent years. There is little doubt that the favourable fiscal regime is a magnet for direct foreign investment in these sectors. But there are other less favourable aspects to these service industries. Financial services and electronic gaming industries are knowledge-based and adverse tax changes or more attractive openings elsewhere can easily prompt operators to move their bases. Their high-skilled international employees are very mobile as is their technology infrastructure.
When addressing the media in the Opposition’s launching of the pre-Budget document themed ‘A sharing economy’, the Nationalist Party spokesman for the economy, Claudio Grech, urged the government not to continue to rely solely on the growth generated by the gaming and financial services industries. He argued that these economic activities were vulnerable because they were highly dependent on fiscal incentives.
This advice should be heeded by the government in the context of the push by the EU to bring about tax harmonisation in the foreseeable future. European Commission president Jean Claude Juncker referred to the need for tax harmonisation in his latest state of the union speech to the European Parliament. French President Emanuel Macron and German Chancellor Angela Merkel also share the vision of a Union where tax harmonisation is a reality.
Understandably, the government and the Maltese MEPs have often voiced their disagreement to a one-size-fits-all tax regime arguing that small states should not be deprived of one of their main competitive advantage – fiscal flexibility. The government insists it would oppose any attempts to dismantle fiscal sovereignty by using the right of veto. This is a reasonable short-term tactic to protect the services industries that are helping the Maltese economy to grow.
The realities that determine the policy direction of the EU are that when the larger member states, like Germany and France, decide on a strategy that is desirable for the future success of the EU, despite its negative consequences on the smaller member states, they will find a way of pushing ahead with reform. When Britain leaves, the EU countries with prospering financial services industries, like Ireland and Malta, will lose an important ally in the resistance to tax harmonisation.
Mr Grech’s recommendation for more diversification in Malta’s economy is based on these realties that sooner or later will affect us. Diversification can have various aspects. Malta needs to invest more in its people’s skills base. The gaming industry is already heavily dependant on foreign personnel because there are few local people with the necessary skills sets.
New services industries also need to be attracted by Malta’s strategic location rather than by fiscal incentives. Such industries include the various maritime services that are in demand in the Mediterranean.
Future prosperity will always depend on the country’s ability to have different economic activities driven by various critical success factors. Malta can rise to the challenge.