Desperately seeking an economic vision | Josef Vella

UHM chief executive officer JOSEF VELLA argues that Malta is facing a ‘crisis situation;’ and as such, we can no longer afford political bickering over the country’s economic direction

The annual Budget is always a highly anticipated event; but this year, expectations seem to be greater than usual. Budget 2024 unfolds against the backdrop of spiralling inflation, and a general feeling of unease concerning Malta’s entire economic model. Do you share the view, then, that this an ‘extraordinary’ Budget, by usual standards?   

Let me put it this way: every budget has its own story. And for politicians – especially, finance ministers – it's always a ‘special’ budget, for some reason or other. Back in 2008, it was because there was an international crisis going on. And we've been hearing the same sort of thing ever since, basically...

But is there anything really ‘special’, about this budget? I think that what is being done, at the moment, is more of an accounting exercise, than anything else. That is to say: government has to seek ways to control its expenditure; and it has to ensure that it gets its dues, in the form of tax collection. And on that level, I think the government is doing a good job, overall.

However, the question we are all asking is: will this budget provide an economic vision? Because that's what the country desperately needs, right now. As things stands today, we are relying too much on quantity: whether in the tourism sector, or in various other sectors – except maybe agriculture - but the point is: this strategy is simply not working.

In fact, it is only overheating the economy. Go to Mater Dei Hospital, on any day of the week, and you’ll get a glimpse of what I’m referring to. Even in the emergency department, you'll find that – out of, let’s say, 70 people – maybe around 10 will be locals.

Now: to avoid any misunderstandings, I’m not saying the problem is that ‘they are foreigners’, and ‘we are Maltese’. It is simply that Mater Dei was not actually designed to cater for the size of the population, that we have today.

It’s a bit like having a car, which can carry a maximum of, let’s say, five passengers.  You might be able to squeeze in a sixth one, right? But there's no way you’re going to manage in squeeze in 10.... because something will happen, sooner or later. The braking system will fail. The axle will give in. You know what I mean...

I think I do, yes. And so does Clyde Caruana himself, it seems. For the past two years, he has been suggesting that ‘Malta economic model needs to change’.  But isn’t this also one of those problems that is very easy to ‘diagnose’... but not to ‘cure’? What is your own proposal, on how to actually change Malta’s economic model?

We cannot provide alternative models, until we start answering some very basic questions. Such as: what capacity do we need for this country? What is the maximum capacity this country can even hold? And what sort of the infrastructure do we have, at present? Can it cater for 1 million people? 2 million people?

Because don't forget: when we talk about Malta’s population hovering somewhere between 600,000 and 700,000 residents: we don’t include all the tourists who come here annually. So at any one time, there might be well over a million people on the island, at once.

Take, for example, what happened during the heatwave last July. What we saw two months ago, was a literal ‘overheating’ of the system. Now: let’s not go into all the explanations we were given – it was because of the heat, the sun, the temperature, and all that – because... I mean, come on! Even if the temperature was 50 degrees: it’s still not going to melt two inches of copper piping, two metres underground. Forget it.

Nonetheless, there was ‘overheating’ of another kind: coming from the increased demand for electricity, as a result of the population growth.  The DEMAND, please note; because there is no problem with the ‘supply’ side.

But the distribution network cannot handle such a high demand, because it was never planned to cater for such a large population...

I see your point, but that doesn’t bring us any closer to a solution. Let’s face it: this ‘population growth’ is not happening because of any increase to Malta’s birth-rate (quite the other way round, in fact). So basically, we are talking about immigration...

I don’t call it ‘immigration’, myself. I call it ‘importation’...

Well, that word doesn’t seem entirely appropriate, to be used for people. But let’s go along with it for now...

[Shrugs] Appropriate or otherwise: that is what we are doing, in practice. We import workers from third countries, on the basis that: compared to what they would earn in their own country, our ‘minimum wage’ is enough to make them rich. A person in Pakistan can expect to earn somewhere around about $2 a day. In Malta, they get E4.50 an hour...

No doubt. What I was coming to, however, is that: people don’t import things, for no particular reason. Those imported workers (most of them, anyway) would have responded to vacancies in the local job-market. And many of them are employed in jobs that Maltese workers don’t even want to do, anyway. Doesn’t that also mean that Malta depends on the ‘importation’ of foreign labour, up to a certain extent?

Let’s start with the question of ‘jobs Maltese workers don’t want to do’. I think that the Maltese people would be more than willing to go for those jobs... as long as they are given good conditions, and good pay.

For example: as a student, I used to work in catering... and back then, the standard pay was ‘zewg liri Maltin [Lm2] fis-siegha’.  How does that work out in euros, at the current exchange rate? ‘E4.66 an hour’. How much are today’s catering employees getting paid, on average? ‘E4.66 an hour’...

[Pause] Do you mean to tell me, then, that – after 30 or 40 years – the rate-per-hour, in catering, still remains the same old ‘zewg liri Maltin’, that I was paid when I was 18 years old? And do you expect Maltese workers to say: “That’s the job I want to go for?”

No, it's not going to work that way. But if you ask me, the biggest harm done in the last 10 years, was that we depleted the private sector of Maltese employees.

Take factories, for example. Until recently, their HR people used to call every day, asking: “What are we going to do? We don't have any workers left. Everybody's resigning, left right and centre...”

What happened? Those workers resigned from the private sector, because they were OFFERED [heavy emphasis] a job by government. There were even cases where the ministers themselves hounded employees to leave their job, and come work in the public sector instead.

This is especially true in Gozo. If you go to Xewkija, you will find factories with not a single local employee... and until recently, they had no workers at all! So... what are we trying to do, here? Because I say that this was not a ‘coincidence’. This was a plan...

I take it that this ‘plan’ involves politicians using those public sector jobs to ‘buy votes for themselves’... right?

Yes. There has been a concerted effort, on the part of politicians, to entice workers with promises of ‘cushy jobs’ – when those workers were already gainfully employed with the private sector.

And it’s not just coming from the Labour government, today. It used to happen under the Nationalists, too. Because the problem is not with one party, or the other: it’s with the political system, as a whole.

Meanwhile, the outcome is that: on one hand, we have all these Maltese graduates, fresh out of university, who are seeking employment abroad – because the local salaries and conditions are so poor – and on the other, you have Maltese workers with lower levels of education, who are seeking only to land themselves a comfortable job, in the public sector.

On top of that, you have politicians who encourage that mentality among the population. Instead of working on a long-term plan for the national economy... politicians simply look at what individual people out there might need, or want; and just give it to them, regardless of whether ‘meritocracy’ comes into the picture, or not.

This is why I compare this nation to a family: where the ‘parents’ (government/politicians) are pampering their ‘children’ (people/voters) beyond all reasonable limits. But it can’t go on forever. Clearly, the time has come to change that mentality; but are our politicians prepared to take that step?

This brings us back to the Budget: which is where governments usually outline their economic strategies, for the coming years. What sort of measures do you WANT to see... and, conversely, what do you realistically expect, from Budget 2024?

To start with, one thing I would like to see in this Budget – though I very much doubt government will concede to it – is that the COLA reimbursements are no longer taxed, as they are today.

This is an injustice: because you have to remember that COLA is actually a refund, at the end of the day. And you can’t ‘tax a refund’.

To give you an example: if you were a UHM employee, and we asked you to conduct an interview in Gozo... you would take the ferry to Gozo; come back with the receipts; and then, we would refund your expenses.

Now: that money would have been spent on services such as the ferry ride, etc. So 18% of it would already have gone to the government, in the form of VAT. How, then, can government tax the same sum of money, a second time?

Yet this is exactly what government is doing, by imposing a tax on the E13 COLA increase. And it’s not the only example. There is an element of double taxation, even when it comes to National Insurance. If you earn a salary of, say, E20,000: 10% of it goes towards NI contributions... leaving you with E18,000 in your pocket. But then, your Income Tax contributions are still calculated on the full E20,000: even if E2,000 of them have already been paid, as a tax.

These are all injustices, that government continues to justify by saying things like: ‘Listen, guys: don’t forget that we are also subsidising your energy bills!’, etc.

The problem, however, is that the energy subsidies are being given out to everybody, equally – including both employers, and employees alike. But the COLA injustice is only affecting the workers...

Speaking of energy subsidies: Clyde Caruana also hinted that these may have to be removed, in the near future; and he is under considerable pressure to do so, from the European Commission. But isn’t this just another example of unsustainable economic policies, driven by political interests? Isn’t the Labour government just ‘buying our votes’, by subsidising our energy bills?

I don’t see it as the same thing, to be honest. Actually, I think that – if (or when) government does stop the energy subsidies – neither families, nor places of work, will be in any position to withstand the impact.

You have to remember that Malta ‘tax-GDP ratio’ currently stands at around 38%. We are not hovering somewhere around 15%, like some countries... but we’re below the EU average of around 40%.

If we were to remove the energy subsidies, however: our tax-GDP ratio would shoot up far beyond the 40% mark. And that would make Malta one of the most taxed countries in the world... if we choose to go there.

It might not be a question of choice, though. Malta may be forced to go in that direction: if not by the EU, then by the sheer unsustainability of the expense involved...

That’s the point I was making: Malta doesn’t have a lot of room to manoeuvre. But let’s say we do want to go there, out of choice. The first thing we’d have to do, is see to it that people have the money to pay their taxes. It’s pretty useless taxing people, when you know that they don't have the income to actually pay.

First and foremost, then, we need to address productivity. Only when the productivity rate has increased, can we start talking about ‘improving salaries’. And only then - when you have a better salary-structure in place – can you begin considering a strategy to eventually stop the energy subsidies.

But before any of that can happen, you have to ensure that the nation is ready to take the impact, when it comes. And as things stand today: nobody is ready to withstand that impact. Nobody...

So when Minister Caruana said, yesterday, that: ‘At some point, we will have to stop the subsidies’... the question is: when? And what strategy is he considering, to prepare the country for the blow?

This is why – in my opinion – it all comes back to the need for a clear economic vision. As things stand today, the two parties are still competing over different ‘national strategies’. We cannot afford that any longer. We need to agree that we are in a situation – and with the challenges facing us today, I would even call it a ‘crisis situation’ - where we have to come together, and identify a common, national strategy: to be implemented, regardless of who wins or loses an election.

It doesn’t mean that there shouldn’t be any political competition, between the two parties. They should still compete, over who is best suited to implement the necessary reforms. But on the reforms themselves, there has to be consensus.

We cannot continue to have political parties offering us an economic vision for only five years... and then, somebody comes along and changes everything around: so that we have to start all over again, from scratch.

Now: some people out there will disagree with my position. They will say, ‘Oh, but Malta has existed for thousands of years... and somehow, we always managed to survive.’ In today’s geopolitical context, however: that’s clearly not enough, anymore.

To survive in the world today, we need a common vision of where we actually want to go. Otherwise, we will just carry on going round in circles, like we’re doing today.