Mostly positive on the economic front

The recent European commission forecast for Malta’s economic performance in 2014-15 will no doubt have given the Joseph Muscat administration some breathing space ahead of an imminent electoral challenge.

At a glance the prospects look good. Malta’s deficit has narrowed to 2.8% from 3.3% last year, and in 2014, the deficit is expected to improve further to 2.5% of GDP. This would appear to validate the government’s deficit reduction strategy with a nod of approval by the Commission.

Muscat may also feel vindicated in his most controversial decision to date: the IIP citizenship scheme, which is singled out as a contributor to the projected surge in government revenue in 2014. More significantly, like the Commission itself he may be “surprised positively” by 2013’s 2.4% growth of GDP in real terms. Coming at a time when most other Eurozone countries are experiencing the opposite, this argues a powerful case for the government’s economic administration.

There are however indications of other areas that need to be addressed. Two are of particular significance, because in different ways they also reflect how party politics can sometimes eat into a government’s financial plans.

One note of caution sounded in the EC assessment was the “higher than budgeted” disbursements related to the car VAT refund scheme, which it warned could jeopardise other government targets. The scheme is expected to cost the government between €25 and €31 million. It was a commitment Labour promised in the early days of Joseph Muscat's leadership.

On one level it is commendable that government is so mindful of keeping its electoral pledges. But the fact remains that this promise was originally little more than a knee-jerk political calculation aimed at exploiting the illegal VAT on car registration tax. We can see from the EU report that there was a cost in implementing it, which may spill over into other areas of public finance and administration.

This illustrates the dangers of basing one’s economic performance on targets which are more political than financial. One could add other examples to the list: an increase in University stipends, while arguably easier to contain, likewise serves an electoral purpose, and likewise can be seen to affect government’s ability to intervene in other sectors.

The same report also projects a drop in employment creation, from 3.1% to 2.1%. This in turn underscores an endemic problem which is well known to people in the business sector. New jobs are being created, but not in all economic brackets. Unskilled job hunters are increasingly being driven out of the labour market; and if the unemployment rates remain stable, that is mainly because more jobs are being created in the upper branches of the economic tree.

The long-term consequences of this could include high levels of unemployment in future.

Another area of concern is the Commission’s warning regarding possible delays in the new Delimara poer station, as well as the fact that a significant contributor to Malta’s overall performance has been the reduction in utility tariffs, which resulted in a boost in spending power.

Taken together, these two factors point towards an overall reliance on government’s ambitious energy project to sustain the economic growth forecast for 2014. Few would deny that the reduction in tariffs was in itself a goal worth pursuing, and it is reassuring to note that its economic benefits are already being felt. But this in turn depends on government not overrunning the budget for the Delimara power station, or incurring any other unforeseen expenditure increases on the energy front. The effect is to make the Commission’s entire positive assessment vulnerable to the one area that has consistently witnessed cost overruns in past decades. And that is not necessarily good news.

Moreover, given the realities of Malta’s own vulnerability in energy production – our reliance on expensive fuel imports, the fact that water production consumes a significant percentage of available energy, etc. – some would question the apparent encouragement to consume more energy rather than less.

Government’s recent campaign appears to directly urge citizens to become energy-wasters. “Go ahead, switch on” may sound like a catchy slogan; but it is not the soundest advice to give, at a time when the rest of Europe is preparing for a likely energy crisis in the near future.

Clearly, it is unwise to rely too heavily on economic activity which is generated chiefly by a reduction in energy tariffs. So while Joseph Muscat may be forgiven for indulging in a little boastfulness when confronted with this report – which after all comes only one year after others had predicted the need for an EU bail-out – he would also be wise to take stock of the underlying symptoms outlined by the same report.

The really good news, however, is that the economic growth projected in the same report should also give the government the protective financial cushion in needs to embark on some of the structural reforms that we all know are really needed. Too often have we heard governments complain about the lack of funds as the reason for failing to keep electoral promises, or postponing important reforms.

With such positive economic prospects, hopefully we’ll hear it less in years to come.