Editorial | Sunday, 20 September 2009

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A tight space for the economy

The reality of the world recession and the after-shocks being felt in the Maltese economy may have left little room for manoeuvre for the government. Government revenues are down, with income tax collected at the end of July at 40% of its projected 2009 level. With the pressure from Brussels to focus on deficit-reduction, Malta’s resilience is being tested by the stormy seas from the global crisis.
While major industrial countries are reporting their first signs of recovery from the recession, the Maltese economy has begun feeling the real effects of the crisis: as businesses have reported, tourism – which accounts for a quarter of our gross domestic product – has suffered; the semiconductor business (accounting for 15% of the GDP) has also been shaken.
The latest assessment by the International Monetary Fund also reports that inflation remains “stubbornly high”, unemployment is expected to breach the 7% mark, and public wages increased by over 4% thanks to collective agreements. The worsening deficit has as its backdrop the early retirement schemes paid to the shipyard workers, energy subsidies but also the wage bill “partly related to the health sector and to the elections in March 2008”. The latter, a slippage in spending over the first three months of 2008, included a €40 million spend over and above 2007 levels across all ministries.
The ongoing battle with government’s recurrent expenditure will always be a matter of concern. Inefficient practices are responsible for the squandering of millions of euros: expensive consultancies that never see the light of day, expensive travel and hotel accommodation for government officials, a lack of transparency in funds spent on major contracts and direct orders, and the inflated costs of several ministries.
These are just the tip of the iceberg. The IMF points out that two-thirds of government spending goes to wages and interest payments, and that this crowds out spending on capital projects – currently at a low ebb. Healthcare and education absorb 30% of public spending and the IMF is recommending “rationalisation”. Government has resisted cutting its wage bill because it relies on natural wastage to reduce the cohort of public sector workers – a sign of electoral concerns being high on the government’s agenda. And the IMF’s suggestion for a broader means-testing of social services may have found life in Tonio Fenech’s announcement to target benefit fraud, most notably by single mothers: populist, yet with easily treacherous consequences.
Other concerns make for some worrying reading. Malta’s survival in the economic storm depends on other factors beyond mere price and fiscal considerations. It needs a combination of strong human resources and efficient work practices to heighten its international competitiveness.
But the country still suffers from one of the lowest spending levels in Europe on research and development; labour productivity has failed to increase; Malta retains the lowest employment rate for women in the EU; and secondary education attainment “remains suboptimal”.
Interestingly, the IMF confirms that Malta’s regulatory structures are not as strong as consumers need them to be. There is no doubt that the Office of Fair Trading must be strengthened, and the IMF remarks that the competition authority (and surely with it, the resources authority) must address monopolistic threats faster. A stronger role is needed for the regulatory bodies to become the real guardians of consumers on prices charged by monopolies, but also to look into utility charges and some unacceptable banking charges.
Not everything the IMF recommends is surely sweet medicine: the organisation suggests jettisoning the cost-of-living-adjustment mechanism altogether. Employers believe COLA in 2009 will cost €30 million. Unions on the other hand, argue that the burdens borne by consumers through inflation must be compensated by the COLA. Nobody can ignore the fact that the utility hike, owing to a full-cost recovery model, greatly shocked consumers into reducing spending.
It is time for the social partners to forge ahead with a common position that also allays fears of demands for wage increases that do not reflect labour productivity.
UHM boss Gejtu Vella remarks in today’s interview that government may be its own worst enemy. Considering its tendency to promise tax cuts to curry favour with the electorate (unlikely to be honoured in the current economic climate), and its reluctance to attack a bloated public sector (inflated by pre-electoral spending sprees), there is much truth in Vella’s observation.

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A tight space for the economy


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