Many forget that 2012 was an election year which caused additional fiscal slippages such that the Commission warned us about a high debt to GDP ratio and that unless we tightened our belts it could impose an Excessive Deficit Mechanism. Our collective memories are short yet the good news is that the GDP ratio has stabilised and during the past four years it has scaled down from a high of 72 per cent in 2009 to under 63.9 per cent. This is of course higher than the maximum rate of 60 per cent threshold as set by the Maastricht Criteria, but the government plans to reduce it further in the coming years.
Tighter fiscal control has rewarded us with better performance and it is encouraging that the debt-to-GDP ratio for 2015 also outperformed the European Commission Spring forecasts and the Ministry for Finance debt projections. This reflects the increased economic activity and improved tax collection which are the hallmarks of an economy on the mend. All this was achieved without resorting to higher taxation or new austerity measures; in fact the top personal tax rate for a manager’s salary is now capped at 24 per cent. Malta registered a historic economic growth last year, with its GDP amounting to €8,796.5 million; however Minister for Finance Professor Scicluna noted that this was largely due to a 21.4 per cent increase in gross fixed capital formation – a sudden launch of several EU-funded projects ahead of the deadline to tap into structural funds.
It goes without saying that our recovery has been hard-won, yet we cannot afford to turn the taps full on and start splurging on benefits. It is tempting to suggest no taxes on pensions (irrespective of ceilings) or that the government distributes this perceived treasure chest to reduce absolute poverty. Such good tidings did not come by reciting Hail Marys but by the government’s sheer determination to improve growth in private consumption buttressed by falling unemployment (now reaching a low of 3,700), higher exports, lower energy costs and a concerted drive by Malta Enterprise and FinanceMalta to attract new foreign investment.
One must mention the recent deal secured with Crane Currency in USA together with new China investment in EneMalta – the ailing national utility (previously limping along with €800 million in foreign debts). The latter has turned the tables in its favour and the energy sector is now consolidated by new capital injected in the construction of a gas power plant. There is a strong temptation to return to profligacy mode when we are less than two years away from a general election – this must be resisted. The patient has shown signs of recovery but cannot afford to turn back the clock and indulge in old habits. Can we risk that?
The spendthrift will tell you forget about tomorrow – throw caution to the wind and borrow more to fix our potholed roads, increase welfare benefits and splurge on generous pension hand-outs to all. Little do they care how fragile tourism and gaming, the main pillars of our economy, are. Can we rest on our laurels just because in the first nine months of 2016, tourist arrivals broke all records?
In the third quarter of 2015 the number of cruise liner calls increased to 102, from 91 a year earlier. As a result, the number of foreign cruise liner passengers rose to 192,570, an increase of 39,522 over the same quarter of 2014. These positive trends are welcome (if maintained) and result in better jobs. In fact, according to the Labour Force Survey (LFS), the unemployment rate stood at 5.4 per cent in the second quarter of 2015, down from 5.8 per cent a year earlier. As can be expected with more shoulders to the wheel, more tax revenue has been collected that during the second quarter of 2015, revenue grew by 7.5 per cent.
The finance minister was prudent and quickly dismissed calls for the state to instantly distribute more wealth, warning that government revenue has not yet reached a high enough level. Party apologists take an opposite view. They blow their trumpets and rub their hands in glee saying that the economy continued to expand robustly in 2016, with real gross domestic product (GDP) reflecting superlative results gained by the tourist industry, financial services and the gaming sectors. Naturally, the proof of the pudding is the employment statistics and these point to a healthy and steady improvement reaching historically low levels.
Sadly, EneMalta will not generate profits until 2017 even though the price of oil is only around $50 per barrel. Yet EneMalta has announced its first major export order consisting of an €80 million wind farm project in Montenegro. The Opposition claim there is corruption in every closet and this has dirtied the waters for our own squeaky clean financial services industry. It has also led to ferocious partisan mudslinging when a PN blogger revealed ahead of the Panama Papers that a minister and a Chief of Staff in the Office of the Prime Minister had both engaged local consultants to open trusts in New Zealand with a subsidiary in Panama.
The minister duly closed both entities but was disciplined. He had to renounce his office as deputy prime minister and lost his energy and health portfolio. So far no smoking gun has been found amid cries by PN activists of no smoke without a fire, yet there was no trace of millions, or of Picasso paintings populating such trusts. Notwithstanding this internal issue, the Commission is keener than ever to tackle delicate matters such as corporate tax avoidance in Europe.
This is estimated to cost EU countries EUR 50-70 billion a year in lost tax revenues. EU countries have already signed agreements to the sharing of information between tax authorities. Plans are in the pipeline that will require multinationals operating in the EU (only those with global revenues exceeding EUR 750 million a year) to publish key information on the domicile where they make their profits and where they pay their tax on a country-by-country basis. The same rules would apply to non-European multinationals doing business in Europe. In addition, companies would have to publish an aggregate figure for total taxes paid outside the EU. Those pronouncing the virtues of fiscal morality say this proposal is a simple, proportionate way to monitor multinationals' accountability on tax matters without damaging their competitiveness.
Pre-budget documents reveal that our economy is on a good trajectory with an ambition to reduce national debt to below the prescribed 60 per cent of GDP and a balanced budget. Did we hit the jackpot? Does this mean there should be generous state handouts to match the perceived feel-good factor? Not surprisingly, the General Workers Union (GWU) presented a proposal for an increase in the minimum wage – not across the board but by way of an additional top-up from the government.
Really and truly the government should resist pressure to beef up the minimum wage beyond increases regulated by a social pact signed many years ago. This functions through the COLA mechanism. The Employers Association say wages are to go up only when productivity increases. They advised the government to keep both feet on the ground, considering mounting competition on exports by other Mediterranean nations.
As always, for politicians the right moment when to choose between profligacy and belt tightening is an enigma. It may be compared to the complexity posed by the ancient Greek philosopher Zeno (ca. 490–430 BC) who baffled the world with his unsolved set of paradoxes.
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Mr Mangion is a senior partner of the audit and consultancy firm PKF
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