|
Economist Gordon Cordina sees this budget as a step in the right direction for our country’s ailing economy but warns that if the government’s targets are not achieved we will have to face even more draconian measures in the years to come 
As an economist, Gordon Cordina knows that the government’s budgetary measures to boost the country’s competitiveness will never be enough to allow Malta to compete with the economic tigers of the world. But being also closely involved as an economic advisor to the Malta Council for Economic and Social Development, he knows that drastic economic measures that go against the will of the majority of social partners will only destabilize the country politically and socially.
That is why he laments the failure to conclude a social pact prior to the budget.
“Government can always do what needs to be done independently of the social partners, however, the credibility and effectiveness of the measures which will be undertaken by government would be all the more strong if there is consensus. It would also be an important signal to outside investors, that we are serious about our reforms and that we mean business,” Cordina says.
“From an economic point of view, government would do far better to be more draconian and take more drastic measures, but that might create more problems than you’re trying to solve when you consider the social fabric, because the economy is nothing without the underpinning of a stable social and political fabric. There were many governments around the world which tried to follow economics textbooks to the letter, did what is right according to economics textbooks, but then society didn’t accept that, with the ensuing industrial unrest and social problems. So whatever government does must be acceptable to the people, that’s how it works in a democracy.”
The government, however, did not seem to be in a position to give back anything in return to unions who would have agreed to give up rights and benefits that workers have enjoyed so far, although Cordina says that should not have been the spirit of a social pact.
“It should not be taken for granted that whatever benefits we are enjoying right now can be sustainable indefinitely in the future,” he says. “We have new entrants in our export market, new competitors, countries where the standard of living and employment conditions are far inferior to ours’, and we can’t escape this economic reality.
“So in order to justify our benefits we must give more value for money in our work. This need not be seen as a quid pro quo, someone gives something in return for something else. This is a problem which we must all confront together. In other words I didn’t see the social pact as a mechanism for horse-trading, not at all. We have to realise that our economic growth rate is among the lowest in the EU, our fiscal deficit is among the highest, we have these problems and we have to identify ways to solve them.”
Short of a social pact the government went ahead with part of what it intended to implement. Does he believe the targets stated by the government can be achieved with this kind of budget?
“The budget was undertaken with the idea that it has to solve the problem of low economic growth and excessive fiscal deficit. There’s a viscous circle between these two factors: low growth results in a higher deficit, and a higher deficit further constrains economic growth, so as far as I can see the intentions of the budget are to break this viscous circle.
“Of course the budget presents a number of interesting targets, the question now will be the actual implementation of the measures, particularly where they concern the stimulation of economic growth. A number of areas were mentioned: tourism, research and development, help to small businesses, a specific development plan for Gozo. Plans on paper look beautiful but the actual implementation must be done correctly.
“That is where I believe a civil service reform is needed. It is basically the civil service and the public entities which must implement these measures. Now they must be subject to proper incentives so that people behave in a way which enables the intentions of government to come to fruition. That is where we must address an important management problem.”
But with a bloated public and civil service, the only government response so far in its restructuring drive has only meant redeployment, that is sacking people from one department only to reemploy them somewhere else. That is hardly reducing the excessive labour force with the government.
“The kind of restructuring that you have mentioned actually is not working if you want a reduction in expenditure,” Cordina said. “Actually, sometimes it is costing more. But at least one hopes that through these redeployments we are getting something in return as a society; one hopes that they are being more productive. Of course it would be desirable to reduce the civil service but only in those areas where there is low productivity; it would be even more desirable to increase productivity.
“These are the nitty-gritty problems that really matter. It’s not a question of only looking at the budget, it goes beyond that, it’s about the everyday management skills and practices that are needed for the overall economy. What I would really like to see is a situation whereby people are given targets based on priorities which the civil service really needs and then seeing that they’re empowered to achieve those targets with the resources they need.”
So shouldn’t then government hire and fire according to the targets it sets?
“I’m not an economist who advocates throwing out all the people who are redundant with government,” he says. “That would be a fair comment to make provided that those people had been given the right incentives to acquire the proper skills earlier on. Since they have been fooled more or less for a number of years into believing that they can continue enjoying an easy job with government forever, you cannot now suddenly throw them out on the streets.
“That would not only be individually and socially problematic, it would also be economically problematic because it would destroy purchasing power and create uncertainty. So before actually reducing the size of the government workforce you have first to empower these people with the proper skills so they can be properly redeployed elsewhere. It’s a responsibility which I believe the government has towards its staff.”
This is more or less the kind of strategy which is being tried in the restructuring processes of a number of public sector entities such as the drydocks and PBS, Cordina says, although he adds: “The extent to which it is being effectively implemented? Well time will have to tell us that.”
As regards taxes, our rates are not high when compared to EU standards, Cordina says. The problem is the progressiveness of these taxes.
“We’re OK there if you consider the total tax revenue compared to total GDP. What is problematic in Malta is the progressiveness, the fact that as soon as you earn more money you pay so much more of it, there is a big disincentive to work in the formal economy so you end up with a lot of people evading or avoiding taxes. I do believe that we still have some work to do so as to make our tax system less progressive and perhaps more effective at stimulating more economic efficiency.”
Thanks to this budget we will all have four public holidays less next year although its effect on productivity is doomed to be minimal.
“It should have a tangible effect in the sense that out of the same wage bill there should be more output being produced, in the region of 1 and 1.5 per cent, but it cannot be defined precisely because of different productivity levels. For example in areas where there is zero productivity it’s useless working more, possibly in the public sector.”
Also, Cordina points out, the cost of living adjustment might be actually neutralising the removal of four public holidays, although it is always better than giving a cost of living increase without eliminating some holidays.
“It will help a bit, though to what extent we still have to see. Time will tell us, then we will see whether we need to be more draconian because there is no other way, or whether we have achieved some degree of success.”
On the other hand, a wage freeze or salary cuts should not even be considered, Cordina said.
“We joined the EU for one reason. Our per capita income right now is 70 per cent of the EU average and we want it to rise as quickly as possible to 100 per cent of the EU average.”
But how could that be possible?
“In Ireland in 1986 they were under 70 per cent, now they are at 110 per cent of the EU average, so the possibility certainly exists and not in such a long period of time. How shall we do it? If you go for a wage freeze you are arguing that you want to sell our output at a low cost and you want a cheap labour economy, but then you can’t expect an economy to go towards higher productivity areas if you are restraining the proper functioning of the labour market from rewarding whoever is more productive. So the markets have to reward productivity, they are not to be interfered with.”
Devaluating the Maltese lira, as is being suggested by the Opposition leader, does not make sense unless it is coupled with a wage freeze, Cordina says.
“Devaluation is often suggested as a means to improve competitiveness because foreign currency would then be able to buy more units of the domestic currency, so we will become cheaper in terms of our exports. This will hold true for as long as other production costs, mainly imports of raw material and labour, don’t rise following the devaluation. One cannot do anything about prices of imports, if exports become cheaper, imports become dearer as well, so to that extent we have lost competitiveness.
“But in terms of labour you can do something, that is freeze wages, so if you want the devaluation to be really effective you have also to freeze wages. But do we want our country to again become a cheap production base, or do we want it to become a more productive base? At the end of the day if you want to be wealthier you have to work harder.”
He also warns that the credibility of the lira is based on the Central Bank’s autonomy from the government, as long as it remains at an arm’s length from political interference.
The Eurozone should be sooner rather than later for our economy, Cordina believes.
“I do not necessarily agree with the strict imposition of the 3 per cent limit for the fiscal deficit, and this is also the position of several other EU countries,” he says, adding that he would also like to see stronger market vigilance so that competition and prices remain reasonable.
“We have to learn from the Italian experience,” he says, referring to the price hikes that followed the introduction of the Euro there because of a lack of market vigilance.
Turning his attention to increasing property prices, he says that unless they are backed with increasing productivity in the economy the property speculation market may become a “burst bubble”.
“As soon as people start realising they just can’t pay those prices, then they will stop buying property, and that’s when the speculation bubble will burst.”
He agrees with government that pension reform should be staggered, raising retirement age to 65 in a gradual manner.
The pensioners’ worst fear is that their basic pension will spanned over 40 years of contributions, which will amount to about one-third of their final salary.
“It depends on the way in which the previous incomes will be valorised,” he says. “I mean I wouldn’t expect the exact wage of 40 years ago to be brought into the computation… it’s not very clear how it will be done… it still has to be clarified…. Of course it wouldn’t make sense to consider your nominal income of 40 years ago, which means nothing in today’s money. Ideally that income has to be increased by the rate of wage increase over the 40 years for it to be realistic, otherwise it would be unfair and totally wrong.”
Asked about the proposed second pillar scheme, he believes that the best situation would be one where government would be responsible to ensure that funds are collected while entrusting the funds to a private sector manager for a limited period of time, subject to strict rules of management and of risk-taking.
Deep down, Cordina is an optimistic economist. Since he last spoke at that mass meeting in favour of the EU last year, he is more convinced than ever that Malta’s accession is not only economically feasibly but also a means of instilling discipline among the otherwise short-sighted political class.
“Consider the risks of not having this pressure, which has disciplined us into doing what is right for ourselves,” he says referring to the pressure exerted by the EU on all its member states. “After all if we work harder it is our society which will benefit, but sometimes we were often short-sighted. The discipline we have to follow will make us more competitive in the international market… I don’t think there would be all this pressure on competitiveness and on reining in the fiscal deficit right now if there wasn’t this discipline from the EU.”
|
