Michael Bonello, recently retired Governor of the Central Bank of Malta, gave a talk a fortnight ago to AZAD, the Nationalist Party’s think-tank and EZA, the European Centre for Workers’ Issues. It was one of several in a conference focusing on Economic Governance and Social Cohesion. Sadly, neither the conference, nor this important talk, was reported in the media.
In the understated language that we have come to expect from him, Michael Bonello conveyed a message that he had already made several times while Governor – that there was an inescapable need to rein back recurrent government spending by reforming the way the welfare state operates. Let me attempt to summarise what he said by quoting selectively from his speech.
He started by setting the problem in context. “In Malta, current account and fiscal deficits [government overspending resulting in more debt] have been the norm virtually uninterruptedly for at least 15 years. The answer is partly connected with the evolution and workings of the welfare state… The very existence of a comprehensive social safety net, compounded by populist policies and the encouragement of a culture of dependency by political parties, both when in government and in opposition, tends to engender in citizens an entitlement mentality and with it a reluctance to contribute adequately to the creation of wealth. This, in turn, translates into productive inefficiencies and market rigidities that prevent the economy from generating the tax revenues necessary to fund the welfare state”.
“The welfare gap, that is the shortfall between all items of expenditure and contributions made in terms of the Social Security Act, more than doubled in the five years to 2010 to €376 million. This deficit does not include another €169 million disbursed as non-contributory benefits... The structural component of fiscal imbalances is further inflated by the increasing share of the elderly in the population, which boosts government spending autonomously year after year, especially on pensions and health-care…”
He then went on to examine whether fiscal adjustments inevitably led to social consequences. Basing himself on the results of recent research in this field, he pointed out that “the correction of fiscal imbalances, accompanied by welfare reforms that improve the efficiency and the targeting of social safety nets, as the Nordic countries have done, can achieve both fiscal sustainability and an even better protection of those in need”.
To me, the most important part of his talk lay in his conclusions. As was expected, these were concise and the solutions were plain, albeit not easy – for those who are prepared to listen. The message was: “Market realities are such that there is a high price to be paid by any government that does not practice fiscal rectitude… The deficit and debt-related concerns that motivated Moody’s downgrading of Malta’s credit rating last week are a typical example of such realities... In Malta’s case, improving the long-term sustainability of public finances is especially urgent because age-related spending is expected to increase much faster than the EU average in the years ahead. The next step in pension reform – the introduction of a mandatory and privately funded second pillar – must not, therefore, be delayed.
“The challenge of achieving a higher level of investment while reducing the budget deficit without raising taxes implies that recurrent spending must be cut. And since most of this type of spending is on welfare, a durable fiscal correction requires a fundamental reappraisal of the role of the State… In Malta’s case, the dispensing of free goods and services to all, irrespective of income – a principle to which both major political forces seem to be wedded – is a wasteful and unaffordable practice in a country that has been living beyond its means for years on end. The priority of the State should be to provide equal opportunities for all, but a safety net only for those who need it most.”
In the course of his talk, Michael Bonello made a passing reference to an excellent report produced by The Today Public Policy Institute two years ago, entitled The Sustainability of Malta’s Social Security System. It was led by Joe F.X. Zahra and a team comprising Sina Bugeja, Joseph Sammut and Jacques Sciberras, and focused on the need for a wide-ranging reform of Malta’s social security system in view of the doubtful financial sustainability of the present system.
Despite presenting the report personally to the Prime Minister, and constant offers to the then Minister for Social Security, John Dalli, for the think-tank to make a presentation about its findings in order to stimulate a public discussion among policy-makers, its words fell on deaf years. A long-standing promise for the Malta Council for Economic and Social Development (MCESD), which contains all the key economic players in the social and economic fields, to receive a presentation, was also never followed up. Unlike all the other reports of the independent think-tank – on, for example, divorce, Mepa, illegal immigration, pollution and renewable energy – all of which sparked off successful public debates and contributed in most instances to policy changes – it was as though this was a taboo area of government policy, one on which the political ostriches had taken a concerted decision to leave their heads firmly buried in the sand.
And yet the consequences of doing nothing – as Michael Bonello has consistently argued – are both foolhardy and irresponsible. The ageing population is an unstoppable demographic reality. The economic risks of inaction and the possible threats to the very structure of our society are very serious. Will the government address this issue in its forthcoming budget or, indeed, in the following budget in the immediate run-up to the next general election?
Will either party address it in their general election manifestos? I would be (very pleasantly) surprised if they did.
The most successful economies and societies are those which have the flexibility, imagination and dynamism to embrace change. But, as I have had cause to say before, our system of government militates largely against confronting major challenges and making the necessary early changes before they are forced upon us. Only the impending bankruptcies of Malta Shipbuilding and Air Malta – and EU regulations – forced the necessary changes on government. Like politicians the world over (think about what is happening today in the eurozone as a result of a lack of political leadership), ours tend to be good opportunists and tacticians, but poor strategists. Their constant dilemma is that what is right is not often popular, and what is popular is not often right.
Proper planning involves hard choices and hard decisions. The longer these are postponed, the more difficult they become. An ageing population and a smaller workforce to sustain it mean an increasing strain on all aspects of our welfare system. In terms of the country’s long-term sustainability, the rapidly growing welfare gap carries with it the seeds of its own destruction. Successive governments have bequeathed a legacy of welfare schemes and free public services that have distorted incentives and encouraged waste. Most importantly, they are unsustainable in their present form. When will our leaders demonstrate the judgement and courage to reform the system before, like Greece, it engulfs us?
Martin Scicluna is the Director General of Malta’s only independent think-tank, The Today Public Policy Institute. He writes here in a personal capacity.