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Growing economic pains

Malta has benefitted immensely since joining the European Union by tapping into various sources, including the cohesion fund, which is meant to help the weaker member countries catch up socially and economically with the wealthier members. The 2021-2027 budget is now being discussed and it seems very likely that Malta’s impressive GDP growth over the last few years will mean that its allocation of cohesion funds will be reduced to €673 million, down 24 per cent on the previous allocation.

This development can be seen from different perspectives. Malta’s GDP per capita is now close to 95 per cent of the EU average. At this level, the island cannot claim it needs even more funds than other poorer states to catch up with the wealthier countries. At a time when the EU has to fill the black financial hole left open with Britain’s departure, the member states that are economically doing well will be expected to contribute more and claim less from the seven-year budget allocations.

GDP growth is only one economic indicator that reflects on the state of health of a country’s economy. It will be foolish to believe that the present impressive growth brought about mainly by massive investment in the gaming, financial services and construction sectors over the last few years will continue for many more years.

Neither will the controversial passport scheme continue to inflate the government’s cash flow forever.

The country’s infrastructure needs a massive, mainly public, investment to come up to scratch. Parts of the road network seems to follow third world quality standards after decades of underinvestment in this sector. The increase in the number of vehicles is cruelly exposing the inadequacy of Maltese roads and the distress this is causing to motorists and commuters alike.

Admittedly, some significant projects have been planned and many will breathe a sigh of relief when they are completed though some argue this will only mean more care use.

So far, Malta could rely on part of the capital expenses being paid by the EU under one of the various development funds. However, this financial support may now not be as generous because Brussels has already indicated that Malta is rich enough to contribute more of its own money for its infrastructural needs.

Social housing, affordable accommodation and the building of a tunnel to ease communication between Malta and Gozo are among the projects that will make heavy demands on government finances. The health system financing model also needs to be re-engineered if it is to continue to provide adequate free health services for all.

Faced with these prospects, the Ministry of Finance policymakers and economists need to ensure that the government’s budgetary process over the next few years takes a long-term view of what the country’s spending needs will be for the coming decade and beyond. They also need to make some stress tests that will indicate how government income could to be affected if the economy starts to slow down for whatever reason.

Affordability and sustainability should be the hallmarks of budgetary projections for both recurrent and capital expenditure. It is unlikely that countries like Poland, Hungary and the Czech Republic will tolerate any cohesion fund concessions given to Malta by the EU.

Ultimately, we must manage our growing pains judiciously.

This is a Times of Malta print editorial

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