Rating agencies praised Finance Minister Edward Scicluna for successfully navigating the ship of state in choppy waters amid the uncertainty of a faltering Eurozone, immigration challenges, the effect of Brexit and the fallout from a devaluing sterling. Moving on, we cannot omit to praise the progress achieved in the financial services sector under the baton of a pocket Hercules in this administration. He is Silvio Schembri - a relatively young politician who displays his talents in conferences, promising to safeguard the future of the growing iGaming sector, not to mention financial services. The latter is under pressure from the Panama Papers and BEPS regime but thanks to his unassailable efforts, he launched the nascent Fintech and Blockchain sectors. As if this gargantuan load were not enough, the Prime Minister charged Schembri with the overseeing of the growing Digital economy and finally - Innovation.

One can admire our latter-day Atlas who is holding the sky on his shoulders and wish him well. But good wishes alone may not be enough to bring home the bacon. The administration is approaching its mid-term blues and it is a good time to reflect on past achievements. During its first term of government, it worked hard to maintain its promise to restructure the ailing Enemalta (a government electricity generating plant) by converting it to run on gas. Previously, it used corrosive heavy fuel oil to generate electricity. Operational, the economy benefitted from a 25 per cent across the board reduction in electricity tariffs; even so, the Chamber of Commerce thinks that another cut is overdue. We concur that such cost-cutting measures increased consumers' purchasing power and boosted business competitiveness.

The economy grew three times faster than the EU average and in 2017 registered a record 6.0 per cent increase in real GDP. All this bounty was registered notwithstanding extra tax cuts on personal income and increases in pensions and welfare handouts. Malta is also spending big on education but still needs to solve the problem of the high proportion of early school leavers. This is revealed in the 2018 edition of the European Commission's Education and Training Monitor. As a developing country, our emphasis was always to spend the highest amount possible to educate our workers.

In fact, apart from subsidizing education from kindergarten to tertiary level, the country is the only one in Europe that pays a monthly stipend and gives free public transport to all undergraduates. Yet the EU report found that "the performance of Maltese students in international assessments remains poor". Passes in foreign languages, Maths and science subjects are below EU average. Notwithstanding this drawback, for a small island, with no natural resources located on the periphery of Europe it is good to read that it ranked as the ninth highest spender on education (per capita) among the EU 28. According to the report, the education bill amounted to 5.4 per cent of GDP in 2016, making up 14 per cent of total public spending. The EU average was 4.7 per cent and 10.2 per cent respectively. Regrettably, while the spend on education is set to increase, so far the amount spent on innovation is a mere 0.6 per cent of GPD (mostly on salaries) which is the lowest in Europe (Finland's is three per cent).

In a patronizing note, the Opposition criticized the government saying the economy is fragile and can be compared to the spurious success of an Olympic athlete who won gold and must never rest on his laurels. They wax lyrical that the only diversification can be the Elixir which guarantees continued success and so far, there was little or no effort in this direction - apart from the sporadic venture in Fintech and the Blockchain. The 2019 budget should not simply paper the cracks but allocate serious money to help the manufacturing sector as it cannot survive overseas competition without a healthy Innovation ecosystem.

The Opposition say the success is only paper-thin and declared that the economy has started to de-accelerate. They expect more investment in waste management, more cleanliness, upgrading the frail road infrastructure and combatting the phenomenon of rent inflation. In their opinion, the 2019 budget can be the enzyme in the Petri dish acting as a catalyst to facilitate faster reactions from economic agents. Only thus can equilibrium be reached. The Chamber of Commerce notes that the menace of gentrification has mutated - just watch how rents in the past five years skyrocketed. Will the White Paper on social housing solve the problem or just skim the surface?

Undoubtedly, it is a good time for landlords. They, rub their hands in glee seeing the rental income escalate when demand from ex-pats remains unsatisfied. All this confidence linked to a welcome rise in standard of living has spurned property speculators in a race to the bottom. The mood seems to be for investors to splash their egos building concrete and glass units in the Eldorado Paceville area. This building frenzy came under heavy attack from environmentalists, Caritas and Church authorities lamenting that confidence in Dubai-ification is only a symptom of unjustified greed. In other countries, it led to the ruination of traditional core values and way of life. Sceptics retort that we are in a time warp, painting a fairy-tale picture about the feel-good factor but deep down foundations are weak. At this juncture, can we assess if our economy is really and truly firing on all cylinders or on the contrary, it suffers from such latent fragility. Our growth potential has been highlighted by the favourable upgrades in ratings by Standard and Poor's agency. The Fitch credit agency also elevated our ranking based on government policy to gradually reduce the debt ratio to below the 60 per cent of GDP. Naturally, the proof of the pudding is the healthy and steady improvement in unemployment rate which has gone down from 5.8 per cent in 2014 to fewer than 4.0 per cent. In my opinion, the most important challenge facing the country is not lack of diversification or perceived low corporate governance but the need to inculcate an innovation ecosystem which has been ignored and left to languish for ages.

To upgrade the quality of R & D capital more millions are needed to upgrade universities and colleges. Having a mere 30 Ph.Ds graduating annually is not enough to populate an ecosystem let alone succeeding to launch regulations to monitor the growth of Artificial Intelligence. Regardless of our tribulations and weaknesses, we thank the Lord for showering us with a cornucopia of delights, as the country is truly prospering partly due to the fruits of our rich harvest. Men of good faith pray that the 2019 budget will succeed to distribute benefits in an ongoing effort to expand our economy and secure a better future particularly for the marginalized, pensioners and low-income families.  

 

 

Mr Mangion is a senior partner of PKF, an audit and consultancy firm..

He can be contacted at [email protected] or on +356 2149 3041