[WATCH] The cost of living is too high for our state of development | Marisa Xuereb

A new way of looking at the economy: Marisa Xuereb

Allow me to start this interview by asking for a quick opinion: what are your own personal expectations, when it comes to economic recovery after the pandemic?

‘After the pandemic’ is a term I am not really comfortable using, myself: in the sense that the pandemic itself is likely to stay with us for a while longer; even if, perhaps, not with the same intensity as the past year.

But let’s just say that life has changed, as a result of Covid-19. And in some respects, certain changes are likely to be permanent. So I think that our expectations or the future should be based on this consideration: how will these changes affect the economy; the way we live our daily lives; the way we socialize; how much we travel, or do not travel; and particularly, how we look at the environment?

When it comes to how the economy is actually changing, however: before, Malta had an economy that was heavily dependent on consumption. And throughout the pandemic, I think we realized that… consumption isn’t everything, in life. You can derive satisfaction even just by spending some time with a close friend; by enjoying the company of others… without necessarily consuming anything.

So I think that we are in the process of reassessing the value of what gives us satisfaction, in our lives. That value is going to change; and so will the way in which we actually consume.

By nature, Malta has always had certain pockets of what we call ‘conspicuous consumption’: for instance, people who buy a lot of branded clothes. But over the past year, people found they couldn’t even go out… so there was no real point in that kind of consumption. People stopped buying; and they also realized that, you can still live without those products. Life goes on.

So I think we will see changes in the patterns of consumption. I’m not saying it will affect everybody; but I think there is a percentage of the population that has learnt to derive satisfaction from other things…

That is both an interesting and valid point. But it’s not really the answer I was looking for.  Let me put it you more directly: do you think that Malta will succeed in returning to the same economic rhythm we were used to, before 2020?

If consumption takes on a different aspect – and I’m not saying it will necessarily decline; it might also spread out over different types of products – the impact it will have on the economy will be different, too. The way we invest, for instance, might also change. Today, businesses are perhaps stopping to think a little more about the risks involved, than they ever did in the past; because they have realized that you can’t take certain things for granted.

So there is a new dimension – which is also, up to a certain extent, dictated by the European Union; and by the direction that banks are now expected to take – that may favour more sustainable investments. Investments that take the environment into consideration, for instance…

By ‘banks’, do you mean Maltese banks? Because so far, Maltese banks do not exactly hold back from giving out property loans…

Up until now, that’s how they have operated. But from now on, there will be an obligation for banks to also consider the sustainability of the investments they make. Personally, I hope this will not be limited only to investment in equipment – where, to be honest, [Maltese banks] have always been a little ‘uncomfortable’ to invest. When you approach a bank to finance an investment in equipment, they will ask things like: but, is this really the most sustainable option? The one that respects the environment the most? The one with the best energy-consumption rates?

It is good that they ask those questions, naturally. But I hope that they extend the same concerns also, for instance, when it comes to financing development. I hope they also start asking: but, is this project really in line with the aesthetic of the streetscape?  Does it take into consideration the environmental impact? Was an Economic Impact Assessment carried out…?

Meanwhile, there has been a lot of talk about Malta’s economic resilience during the pandemic: but how much of that has to do with the government wage supplement? And what do you expect will happen, when this benefit is  eventually withdrawn?

Government certainly helped a lot. It helped to ensure that the majority of the population retained its present employment; and employers were given the peace of mind that, when it comes to re-opening, the workforce that they had would still be there.

But in reality, we are realizing that this is something that we cannot realistically take for granted, either. When it came to the re-opening of restaurants, for example: there were situations where people who had been on the wage supplement for a year, turned to their employers and said that they would no longer be turning up for work, as they had found another job elsewhere.

So I think that, right now, the greatest challenge of any business is to find human resources. Employees…

Former Chamber of Commerce president David Xuereb once expressed the concern that sectors of the local industry – for instance, manufacturing - may end up getting ‘addicted’ to government assistance… much like a drug addict, who finds it hard to break the cycle of addiction. In turn, this may give rise to the unrealistic expectation that the wage supplement will continue indefinitely. Do you share that concern?

Again, it varies from sector to sector. There were sectors that needed to embark on certain structural changes, even without the pandemic. There were other industries which took Covid as an opportunity to invest, and to more or less change the entire way they operated.

And some sectors actually managed to do quite well, in spite of Covid-19. You mentioned manufacturing, for instance. In reality, there were only a few pockets of the manufacturing sector that benefitted from wage supplements. The majority did not experience sufficient revenue loss, to qualify for those wage supplements in the first place.

But obviously, there were exceptions. Those sectors which were in any way connected to tourism – the ones which depend on increased consumption during the tourist season – those felt the impact. And the same goes for the entertainment sector; catering… and also retail. Shops remained closed for months...

Those sectors were certainly affected; and they depended on the wage supplements to a large degree. Now, we have to wait and see what will happen when that assistance begins to be scaled back. Because it is inevitable that it will be reduced, sooner or later. It cannot carry on forever…

So far, you seem somewhat unconvinced that the Maltese economy will recover its rhythm from the pre-Covid days. Could this uncertainty also be because the country is now entering election mode… and traditionally, this has an impact on the economy?

Let’s put it this way: right now, we are passing through a time of many different uncertainties. There is all the uncertainty associated with Covid-19; there is also uncertainty because of the fact that people are still receiving the wage supplement, and we do not know what will happen when this is eventually reduced. Will there be disruptions in the job market? Will employees start looking for pastures new? Will employers start asking themselves: do I really need to employ all these people, in a sector where the business patters have substantially changed…?

And yes: added to all that, there is also the prospect of an election at some point in the next year. In Malta, elections always bring with them a certain level of uncertainty: because people have a tendency to wait and see, not only ‘who wins’… but also, what sort of policy changes will arise from the winning electoral manifesto. This happens, to some degree, with every election.

Meanwhile, regular reports by international credit ratings all give a generally favourable assessment of Malta’s economic prospects; but they also warn about certain factors which might undermine economic growth in future. What are these factors, exactly?

One of the more long-term problems facing Malta at the moment, is the issue of tax harmonisation…

… in fact, there has just been an agreement at G7 level…

Yes. And while the initiative itself is still in its early stages… the real problem is that we don’t know how long we can realistically continue to resist it. That is the reality…

There are, however, other countries which also resisting it; and there is still the possibility that the Council of Ministers might block it, at EU level…

That is the hope of many, mostly small countries; because the truth is that tax harmonisation is… not in their own interest, quite frankly. Why? Because in reality, the taxation system is the only thing that remains, for an EU member state to balance out whatever other disadvantages it might have.  To take Malta as an example: the local market is, as we all know, tiny. Transport costs are obviously higher here, than for countries on the mainland.  The time it takes for a consignment to arrive – because it’s a ‘multi-modal’ network: by sea, over land, etc. – is invariably longer, too.

And these are all disadvantages that make it difficult for us to attract foreign investment. So the investors have to be somehow compensated…

But many of the companies paying favourable tax-rates are service companies that don’t have to incur those costs. And besides: is it fair that a multinational corporation – based in Malta, or anywhere else – gets to pay only 5%, while local industries pay so much more?

I think we need to make a distinction between companies and sectors that have a permanent establishment in Malta; the ones that are really investing here, and making a real difference… and again, manufacturing is a good example. We have a lot of FDIs in that sector; and one of the reasons they came here, is precisely the fact that we offer advantageous tax rates.

Now: for this type of operator, it is perfectly justifiable that they would have to somehow counterbalance all the disadvantages of relocating to such a peripheral island. But when it comes to financial services, for instance… there, matters do get slightly more complicated.

On that level, I think that – as a country – we are still a little too much in our ‘comfort zone’. We cannot continue relying only on our advantageous taxation system, to attract a certain type of activity in the financial services sector…

Coming back to the positive economic outlook: Malta has undeniably enjoyed a period of industrial stability. At the same time, however, there is a sensation that the gap between rich and poor is on the increase; that it is only the few who have truly benefitted from economic growth. Does this growing inequality concern you?

When you’re in business, the one thing you want is for everybody’s purchasing power to increase. Because at the end of the day, your market is the entire population: and if there are sectors which can afford to purchase, and others which can’t… then your market, which is already small to begin with, will only get smaller.

As for the inequality gap itself, however: it depends how you look at things. Today, the situation has changed a lot, from the days when we talked of ‘upper’ and ‘lower’ classes. It also depends on which sector you are operating in. For instance: we experienced a phenomenon, in this country, in the rental market. Anyone who had a room to rent, found an alternative source of income…

Not everyone owns property, though…

Not everyone benefitted, naturally. But I do think that the way the property market has developed, also changed the way wealth is generally distributed among the population. And this is one of the reasons why politicians find it difficult to take certain decisions affecting the property sector. Because a lot of people have invested in it.

Naturally, there are those whose investments are limited to ‘renting a flat’… and those who have built entire villages. And there’s a difference.

But there were many different segments of society that benefitted from the rental market, in a way that improved their quality of life…

But what about material poverty, however? Don’t you agree that there is a growing segment of materially deprived, vulnerable people who are – among other things – easy prey for exploitation?

That segment certainly does exist, and we obviously cannot just discard those people, either. We also have a very robust Welfare State, for that very reason…

I can’t agree with you there: statistics show that, compared to other Eu states – including the eastern ones – our welfare state is actually under-resourced. It is for this reason, incidentally, that there is a drive for tax harmonisation: taxation is also an investment in the welfare state…

Again, it depends how you look at things. Malta, for instance, actually has the lowest percentage of people on minimum wage in the EU: only 3%. And the minimum wage itself compares favourably to other countries which have similar standards of living. Obviously, you can’t compare with a country like Germany or Sweden; but Slovenia, Portugal, Spain… we are on the same level, more or less. Even if the GDP per capita, in those countries, is much higher than ours.

Then, there are Eastern European countries where the minimum wage is lower than here…

But I don’t think we’re using the right yardstick here. Do you know what Malta’s main problem is? The cost of living is too high, for the level of development we are currently at. When you factor in the cost of housing – and rent: that same phenomenon I described earlier… it’s a blade that cuts both ways. Compare the cost of rent to the average salary; and that’s where the problem can be seen. And it is also why we are finding it so difficult, to hold on to foreign workers…