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Network News • 12-11-2023

A populist budget with a generous heart

Author: George Mangion - Senior Partner at PKF Malta
Published on the Malta Independent: 12th November 2023

Economists define "development" as a force for good, implying change resulting in growth and advancement to improve the quality of life for all citizens.

Sustainable development can be given an economic definition: one that makes a country wealthier, better educated, healthier. If this is the case, why do so many voci­ferously complain about property development and its impact on society? Is it true that development has rendered Malta more beautiful in the past 20 years? Answer yes, if development was a force for sustainable property expansion, the converse is, it can be harmful and undermines the quality of life.

The government and others label NGOs and activists of being against development. This is not true. It is naïve at best to argue that activists are against a growth that betters society as a whole and makes it more prosperous. Populists embrace a definition of higher growth, which targets rises in gross domestic product, which in turn reflects a higher level of economic activity.

Our economic model is primarily based on numbers - cars, tourists, building permits, hotel rooms, property sales, income, and so on, all measured in monetary terms. Sociologists warn us to be cautious. Europe has a low fertility index, which leads to enhanced TCNs immigration, thus gradually improving fertility rates or by working longer hours and retiring later, and even seeking technological advances to improve productivity. Notice how western economies have a combination of lower labour output and a larger number of dependants.

In Malta, the labour shortage is extenuated by close to 95,000 foreign workers. These have become an essential element within Malta's logistics industry, with their input being crucial for its ongoing development and prosperity. Castille maintains that by embracing the skills and abilities they offer; this helps business community to address hurdles while advocating for fair and inclusive employment practices. In the private sector, the share of foreign workers is at times higher than that of the public sector, such that one in four firms reported that more than 50% of their employees are non-Maltese.

With such a scarce labour supply, workers will increase their bargaining power and demand higher wages. Malta Enterprise CEO Kurt Farrugia was asked about ME's efforts to tackle employee and skills' shortages in all industries. He said, skills' mismatch was a result of shortage of unemployed people who could be trained. While overall the low unemployment numbers were a good thing, there were repercussions such as not having a mismatch of people to be employed by growing industries.

The number of unemployed lately fell by 867 individuals to 7,579, as shown in the latest Labour Force survey while it is good to observe that the employed persons rose by 13,844 to 294,313. The gains made through a steady increase in female participation in the last decade have plateaued and the declining birth rate, lowest in the EU, coupled with the eagerness of young graduates to seek greener pastures overseas, is making it very difficult for businesses and government agencies to recruit locally unless they turn to temping agencies.

Our fly in the ointment is education. This is not gearing up sufficient students particularly conversant in Stem subjects. Many express concerns that automation and artificial intelligence would soon drastically change employment and new recruits would have to be equipped with specialised and specific set of skills if they want to venture out into tomorrow's careers. Moreover, as AI improvements in productivity flourish, a smaller labour force will struggle with increasing demand from consumers wanting quality goods and services.

This is the perfect recipe for endemic high inflation. Is Malta Enterprise board of directors sharpening their knives to start attracting serious businesses, investment and talent to the country? On a positive note, it is a sigh of relief that the finance minister has applied a six-year derogation for application of the two Pillar tax system.

As part of its commitment to support sustainable business, minister Miriam Dalli said the government has pledged €60m to support businesses and start-ups investing in research and innovation, skills, digitisation and energy efficiency. These will be disbursed through schemes by Malta Enterprise and include the continuation of myriad schemes such as Business Development, Business Start, Innovate - Innovation Aid for SMEs, Rent Subsidy Scheme, Research and Development, Skills Development, Smart and Sustainable Investment, Start-Up Finance Scheme, Micro Invest and the Get Qualified Scheme.

So, after assessing the 2024 budget speech, some are of the opinion that we seriously need to change our economic model. Let us look at the classical model based on Keynes' economics. This is a premium model that focuses on careful management of the business cycle - how to fight recessions and ensure that as many people who qualify for work, can get it. By extension, this key idea became the ultimate goal of post-war economic theories. Unlike other forms of economic theory in the early 20th century, Keynesianism envisaged a large role for the state in achieving that end. Governments were supposed to run large deficits (that is spending more than they collected in taxes) during downturns/slowdowns to prop up the economy, with the expectation that they would pay down the accumulated debt during the good times. The Keynesian paradigm collapsed in the 1970s. The persistently high inflation and high unemployment of that decade ("stagflation") baffled mainstream economists, who thought that the two variables almost always moved in opposite directions.

Then in 2020 Coronavirus hit. Supply chains and production have been disrupted, which all else being equal, should have caused prices to surge as raw materials and finished goods were harder to come by. But the bigger impact of the post-pandemic and Russian war has applied brakes on the demand side, causing expectations for future inflation and interest rates to grow even further.

Fast forward to local post-budget scene, the government has beefed up all social benefits in a populous streak to put more money in circulation and mollify demand. Our huge fiscal-stimulus programmes mean that public-debt-to-GDP ratios continue to rise. Yet these factors, no longer alarm the Commission so long as we are marginally below the Maastricht levels.

Our government gingerly aims to reach a level of €13bn in national debt by end of the legislation. This is not sustainable unless in the future our children work harder and do more with less. 

Author: George Mangion - Senior Partner at PKF Malta
Published on the Malta Independent: 12th November 2023

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