[WATCH] Economist says it’s time to shift from domestic demand to export growth

Imagine a budgetary debate discussing the impact of government expenditure – is public spending leading to healthier populations? Greener communities? Smarter cities? JP Fabri, an economist and partner with Seed Consultancy, envisages the budget debate in this way.  

“The budgetary debate gets overtaken by the headline figures. The COLA? The national wage? That’s good. The headline deficit? The headline debt? Good too, but let’s have a deeper discussion,” he tells me as we sit down for this interview. 

Last Monday, the finance minister laid out the economic programme for 2024. It is a budget that comes after a pandemic, during a war between Ukraine and Russia, and at the start of a new conflict in the Middle East.  

To make good for inflationary pressures coming from abroad, the government allocated €320 million to fuel and energy subsidies alone. 

“What I’d like to see from an economic point of view is a bigger effort on the conditionality. Aid or subsidies given on condition that we invest much more in renewables,” Fabri explains.  

Despite the subsidies, inflation is still being felt, particularly in food prices. Fabri points out that Malta’s ‘smallness’ makes it ripe for monopolistic practices, or so-called cartels. “Over time, I believe there’s going to be more consolidation of industry players whereby market power will be concentrated among fewer people.” 

Away from inflationary pressures, social partners have been pushing for a discussion on a new economic vision. Indeed, Fabri says the budget is not the be all and end all of a government’s economic programme. 

“What I really believe is that we should have a discussion on the long-term vision. There have been, but I think we need, an articulated vision of where we see ourselves going.”

The following are excerpts from the interview.

One of the biggest, most expensive measures coming out from the budget is the fuel and energy subsidy, which will see the government work out €320 million in 2024 alone. Is it conditioning the government's economic manoeuvres?  

When you don't have the full natural resources to generate energy, your energy component is a huge cost of economic activity. The government decided to allocate the lion’s share of its war chest to protect the Maltese economy towards this component of expenditure, which is the fuel subsidies. The government took on itself that burden to protect Maltese families and industry from this spike in energy prices. You have an inherent cushion that is being built which ultimately leads to also the continued competitiveness of the Maltese economy.  

There is an opportunity cost because that €300 million could have gone somewhere else, but there's also the other opportunity cost. If electricity prices had increased, then what would have been the impact on families, on purchasing power, on external competitiveness of multinational firms.

There is not much governments can do to tackle inflation, especially governments that don't have monetary autonomy.  But could the government have done something on food inflation? Say, commit itself to investigate cartel practices? 

At the end of the day, you have discrimination happening in the local market in terms of costs and taxes. There are so many complex issues that need to be investigated. There’s a sort of discrimination from a tax point of view, right. You have the large foreign players setting up shop that are paying a reduced rate of tax compared to the Maltese businesses. We need to have an evidence-based discussion with proper studies trying to see what the pass-through to the end consumer is and what the cost structures are, what the tax structures are, and try to see if there are solutions to this.

The Nationalist Party’s first reaction to the budget was that people are feeling the burden of overpopulation of an economic model based on low earners and cheap labour. The crux of the economic analysis is that economic growth is being driven by population growth. Is this a realistic analysis? 

We've seen a boom in construction activity that is extremely dependent on human resources. It's not service-based whereby your productivity per employee is much higher. There was an increased supply of building, there was an increased demand for building, ergo you need builders to build. This increase in the market size led to more purchasing power, to more domestic demand, and that is where economic growth has been coming from. If you deconstruct our GDP, domestic demand is a huge component of that. Ideally, we start seeing a shift and making sure that our export activities become much more competitive and productive so that we can generate much, much more wealth per employee and then you need less employees.

How important is it for Malta to continue building these new economic sectors and where could we be missing out? 

Economic sectors take time to materialise. And economic sectors never reach an end. The aim needs to be to transform them, to transition them into much higher value added. If we look at financial services over time, the Maltese sector has transformed to offer different services or types of services. Today we're a jurisdiction that offers funds, virtual asset licences, EMIs, PSPs. So, the reality is, how do we get this body of legislation to continuously make it more attractive and carve out new sub sectors within an overarching sector.  

The budget is not the be all and end all of a government's economic programme. What I really believe is that we should have a discussion the long-term vision. There have been, but I think we need, an articulated vision of where we see ourselves going. It can't be a vision that straightjackets us because the environment is what it is. What I think we need is to consolidate and streamline; a vision of where we aspire to be. Not only economically, but also socially.