While the worst of the recession is probably over, it is still early to declare that the rainbow heralding better times is clearly visible on the horizon. The most recent report on the Maltese economy by the EU Commission paints quite a rosy short-term view of how our economy is likely to perform up to 2011, but it is much gloomier about the medium-term prospects.
The Commission acknowledges that in 2009 Malta fared better than most other eurozone countries with a drop in GDP of 1.9% compared to a drop of 4.1% in the rest of the eurozone. For 2010 we should be experiencing GDP growth of 1% and, hopefully, this figure will rise to 1.7% in 2011. While this is somewhat better than the growth rate anticipated in the rest of the euro area, it is significantly lower than what it used to be up to 2007. This declining improvement trend will mean that it will take us much longer to catch up with the average GDP per capita of the eurozone countries.
Growth is projected to come mainly from ‘a significant increase in public capital expenditure in environment and construction’. There is nothing wrong with this, except that, as the EU Commission rightly pointed out, ‘exports and investment should be driving our recovery.’
Public investment in 2008 and 2009 fell by 21.9% and 19.6% respectively, indicating that this important item of expenditure and future prosperity is being used as a balancing item to mitigate the worst effects of the fiscal deficit. Hopefully in 2010 and 2011 we will see the much heralded public expenditure projects really taking off and attracting EU funds to our economy. One also looks forward to an increase in private investment to combat what the EU Commission termed as ‘the erosion in Malta’s competitiveness witnessed in recent years.’
While export-led growth should once again resume in 2010 and 2011 as demands for our goods and services in our overseas markets picks up, our declining competitiveness could be a serious threat to the realisation of this target. The Commission’s report clearly identifies high local inflation when compared to the euro area average as one cause of our falling competitiveness.
This endemic problem, which is most marked in food price inflation, is pushing our wages to a level that is higher than the eurozone average. Clearly the government rhetoric about its commitment to curb inflation is little more than hot air exhaled during the budget speeches of the last few years. The Commission report in fact states ‘food inflation is expected to remain relatively firm over the forecast horizon (2010-2011)’.
But rainbow spotting for the Maltese economy becomes unbearably tough when one considers the prospects for improvement in public finances. The Commission report is projecting a fiscal deficit of 4.3% for 2010 and 3.4% for next year. Things would be even worse were it not for ‘assumed buoyant absorption of EU funds’ in connection with major public investment projects. At the same time, tax revenue is expected to remain subdued due to ‘moderate consumption dynamics’. Put in a simple way, Maltese families are expected to spend less as their income is burdened by, among other things, higher energy bills.
The EU Commission report has a very short forecast span but hints at some longer-term issues like the increasing cost of health care as the Maltese population ages. It also points out the importance of accelerating private investment to improve competitiveness. So far we have heard nothing from the government on its plans to address these issues.
The mellifluous articulation of the Government’s vision for 2015 is not enough to paper over the huge cracks that exist in the Nationalist administration’s plans for the sustainability of our public services.
The Gonzi administration is now in defensive mode, trying to clear away the stink of corruption that has engulfed our economic and political life following a series of public contract scandals like that of the new power plant for Enemalta. The rainbow that heralds in a new era of prosperity for our country will only begin to appear when the air is cleared of the dark clouds of public governance that has been hovering above us for several months.
Charles Mangion is Labour MP and spokesperson on finance
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