Malta's deficit is expected to continue to drop, down to 1.6% of GDP, Finance Minister Edward Scicluna said this morning.
Finance Minister Edward Scicluna was launching the pre-budget document 2016, following a meeting he held with the Malta Council for Economic and Social Development. He added that next year, government targets to reduce the deficit to 1.1%
As a percentage of GDP, government revenue stood at 42% in 2014, 0.2% less than was budgeted. As for expenditure, in 2014 it stood at 44.1% of GDP.
The minister said that the last budget was aimed at the middle income groups, giving them more incentives to go to work and removing obstacles, which led to strong results. He said that child-care centres helped contribute towards single mothers to join the workforce and formed part of the productive engine of the workforce.
He specified the importance for government to look at lower-income groups now that the economy is doing well.
The coming budget will look at the lower income strata to see who the real poor people are, as some are getting benefits in kind, some are not. Some are cash poor and some are asset rich. We must distinguish between those who are more in need, the minister said.
The Minister said that the best way to help low-income earners was not through tax band adjustments, but through various options being considered, such as equity release schemes for those who are asset-rich.
He said that Malta is still below mid-table when it comes to the number of years people work, with the average Maltese working for 32.5 years. He said that EU countries usually have a population that works between 35 to 41 years.
The next sectors targeted for growth and investment are the health and education sectors, the minister said. He said that a number of projects underway, including Barts Medical School in Gozo.
Turning to recent scandals, he emphasised the importance of intelligence gathering and communication between ministries and authorities. He will soon present a proposal in cabinet to set up a task force, which will target illicit trades via the catamaran from Sicily. He mentioned that such a task force should include plainclothes officials to gather information and monitor the situation.
Although the manufacturing sector is declining, he said that this was mostly due to the manufacturing of electrical equipment sector, adding that manufacturing of pharmaceuticals, machinery and transport is on the rise.
The pre-budget document read that employment rose by 3.1% in 2014, with roughly 2/3rds of that increase “being underpinned by increased female participation”.
“Employment is expected to continue growing in 2015 and 2016 albeit at a more moderate pace, with female participation remaining the main driver of growth. The unemployment rate is projected to remain below historical averages at around 5.8%. Meanwhile, average wages are set to continue growing, with compensation per employee forecasted to grow by 3.1% in 2015 and then to pick-up to 3.7% in 2016.
As for government debt, in by the end of 2015 it is expected to reduce to 67.2% of GDP and to 65.4% in 2016, the document read.
A rise in personal emoluments
As for developments that occurred between January and June this year, direct tax revenue was around €7.6 million higher than estimated with both income tax and social security exceeding budgetary targets by €5.8m and €1.8m, respectively, the document read. “Similarly, non-tax revenue was €6.6 million higher than expected with revenue from miscellaneous receipts being the main contributor to this increase outweighing the temporary lower than expected revenue from fees of office which is expected to recover in the coming weeks when payments owed to Government by Identity Malta will be affected”.
As for revenue from indirect taxes, it was €9.4 million lower than expected mainly due to lower than estimated revenue from VAT, €16.6 million, which was partially offset by higher than expected revenue from Licences Taxes and Fines by €5.9 million and customs and excise duties by €1.2 million, the document read.
On the expenditure side, higher than projected expenditure on contributions to Government entities and personal emoluments were partly litigated by lower than targeted expenditure on programmes and initiatives. Expenditure on operations and maintenance for the first half of 2015 was broadly on target. As a result, the central Government deficit for the first half of this year was broadly on target with a marginal negative variance of €5.8 million”. In total in 2015, €341,193,000 was spent on personal emoluments, when it was expected to be € 331,536,000. The amount paid on personal emoluments in 2014 stood at €321,604,000
The Minister explained that this was mainly due to the health and education sectors. “When they file a request for a 100 beds for long-term patients, you can’t really say no”.
Long-term demographics and sustainability of the health sector
The pre-budget document also includes some long-term demographic data.”Life expectancy at birth for men is assumed to rise by 6.4 years over 2013 to reach 85.1 years in 2060. For women it is expected to reach 89.1 years, an increase of 6.3 years over 2013. This implies that despite some convergence, female life expectancy in 2060 is projected to remain 4 years higher than that of males. With respect to macroeconomic assumptions, potential GDP growth rate is assumed to increase from 1.7 % in 2013 to around 2 % by 2020, then declining to 1.8 % by 2040. It is assumed to decline further to 1.4 % by 2060.
The unemployment rate (15-64 years) is assumed to increase marginally from 6.5 % in 2013 to 6.7 % in 2060. The female participation rate (15-64 years) is assumed to increase from 50.2 % in 2013 to 66.9 % by 2050 and to remain relatively stable at around that level by 2060. The male participation rate (15-64 years) is assumed to increase from 79.7 % in 2013 to 84.5%by 2030 and thereafter decline to 83.4 % by 2060.
Age-Related Expenditure Projections, age-related spending including pensions, health care, longterm care, education and unemployment benefits in Malta are projected to increase by 6.6 percentage points of GDP over the period 2013-2060 (as opposed to an increase of 8.6 percentage points of GDP in the 2012 Ageing Report).
"An important factor of age-related public spending is the expenditure on pension systems. With the ratio of elderly people to the working age population projected to increase, pension expenditure is expected to have an even stronger impact on total public expenditure," the report read. "Public expenditure on pensions is presently the most important age-related government expenditure item, and is projected to remain so in the future. Over the projection period, pension expenditure in Malta is projected to increase from 9.6 % of GDP in 2013 to 12.8 % of GDP by 2060. The increase in pension expenditure is primarily attributable to an increase in expenditure in old-age pensions that increases from 5.3 % of GDP in 2013 to 10.3 %of GDP in 2060".
Expenditure on pensions is projected to be relatively stable untill around 2040, increasing progressively thereafter thus giving rise to concerns on the long term sustainability of public finances.
"In this regard, the Pensions Strategy Group has drawn a comprehensive strategy that was launched for public consultation in June 2015. The strategy contains a set of reforms to the current pension system directed to secure adequacy, sustainability and solidarity over the long term, without changing the mandatory retirement age or social security contribution rate".
Turning to healthcare expenditure, the projections for public expenditure on health care as prepared by the European Commission indicate that Malta is projected to record an increase of 2.1 % of GDP in health care (compared to 0.9 % for the EU).
"Government is aware of the challenges posed by these demographic developments on healthcare and hence it is actively working on implementing a holistic strategy that will ensure the longterm sustainability of the health sector".
According to the 2015 Ageing Report, an increase of 1.2 % of GDP is projected in long-term care for Malta (very close to the 1.1 % for the EU) as opposed to an increase of 0.8 % in the 2012 Ageing Report) during the period 2013-2060. This increased spending is primarily due to an ageing society and an increase in life-expectancy at birth over the projection period.
Major reforms to the Justice system
The document explains that major reforms to the justice system are currently underway.
“Government is currently implementing the reform measures as proposed by the Commission for the Holistic Reform of the Justice System and a bill regulating the administration of justice, reflecting the recommendations of the Commission is currently being reviewed”.
Another measure which shall be introduced in the near future is the introduction of full time lawyers, seconded to Judges and tasked with the aim of alleviating the Courts’ work load, it read.
“Acts of Parliament, including the removal of prescription for persons in political offices and the protection of the Whistleblower Act have been already been enacted. Party financing legislation has also been approved. Legislation has also been introduced to de-penalise minor offences regarding possession of small quantities of prohibited drugs for personal use and assist users to rehabilitate from drug abuse”.
The document also states that the advanced stage of the transition to e-procurement on a national scale is on track. “This will improve the way Government purchases goods and services from the market and will further provide access to private operators as well as decrease cost related to procurement. Following the performance in Green Public Procurement, improvements to mainstream the administrative procedure across Government were recently introduced”.
The document explains that private enterprise will also be assisted by the adoption of a more flexible approach to retail towards retail opening hours outside the standard business hours. “These amendments are expected to stimulate the retail sector whilst facilitating shopping opportunities for both tourists and local residents. The finalised proposals have also been published for consultation with constituted bodies, the private sector and the general public”.
Employability index
To offer more guidance to students on the choices of jobs that are available for the various lines of studies, an Employability Index is being development, the document read. “This will help provide signalling and help channel human resources towards priority sectors in our economy”.
Malta: A hub for energy-related services
The document describes that government envisages Malta as a hub for energy-related services. “Our geographical location provides us with an ideal platform to service Europe and North Africa. Shanghai Electric Ltd intends to set up in Malta an energy service centre which will service their operations in Europe as well as Africa and Turkey”.
The consultation document can be found here.
To submit opinions, click here.