Politics is full of clichés. So a promise made during an electoral campaign may, not surprisingly, be discounted somewhat. I can assure you that the government’s promise on delivering higher rates of economic growth that are meant to benefit as wide a section of society as is possible is a serious promise indeed.
These electoral plans were immediately transformed into government’s own plans way back in April as expressed in the National Reform Programme and later during the summer through the government’s own Pre-Budget Document.
This year’s Budget 2014 speech was a faithful translation and first phase application of these plans and should not have surprised anyone.
Basically the plan is easy to explain, more so, its rationale.
Over the recent couple of years Malta’s economic and financial set-up has been evaluated by so many international institutions as never before. To the Commission’s regular reports one should add the IMF’s annual mission report, together with those of the leading rating agencies. Further afield one finds the various comparative studies carried out by the World Bank, the World Economic Forum and E&Y’s Attractiveness Business and Competitiveness Surveys. The OECD’s has its own publication on the transparency of international financial centres.
It is natural that the reports and evaluations might differ with regards to certain marginal observations. But in the main they all agree. Malta has indeed various strengths but alas a number of weaknesses which need to be addressed to make Malta stronger and its growth more sustainable. In today’s parlance Malta is either compliant or not compliant with a number of set benchmarks.
We should be thankful for these prognoses. But this is not enough. We need to listen to what they prescribe and more importantly read the writing on the wall. Some messages are not always written in bold language. They could be very subtle and one has to be extra attentive.
This does not mean that you need to agree with them all. But the response in this case is to engage with whom is passing the remarks and explain. Where these issues are cleared then what is left is to address them.
And this is what government is doing and intends to continue doing during this legislature; rolling one’s sleeves and start addressing these most important and pressing issues.
Fiscal Sustainability
First and beyond any other priority is fiscal sustainability. A country’s fiscal deficit and debt levels can lead to a country’s ruin and should be tackled immediately and consistently. Not over a year or two but permanently. There is no year when one can stop and say we have arrived. Like a river with strong currents, the pressure from the electorate is relentless and continuous. It will never be satiated. Faced with that reality we need long-lasting structures and not band-aids.
So starting with this budget we are requiring that all budgetary measures have to respect one important principle. They will not distribute more than is available at present. Public borrowing will need to decline until it vanishes. Any other way is to compromise our own children and grandchildren’s future.
A Fiscal Council as a public watchdog will be set up by law. This year the Auditor General fulfilled this onerous responsibility with great success at short notice. It certified that the government’s economic predictions were tenable. From the Fiscal Council we would expect more. The UK Office of Budgetary Responsibility (OBR) provides an example. But there are many others to follow.
Concomitant with it is the strengthening of the budgetary process and the ongoing spending review.
You cannot effectively and seriously promise control over expenditure if you do not have adequate tools. Ministries have to be given resources, which would be able to budget within their respective planning ceiling. The Finance Ministry has to have the information and clear criteria to allocate the budget among ministries not on what they got last year but on what the needs of the country are at present.
For this purpose my ministry is asking the Fiscal Departments of both the World Bank and the IMF to look into certain aspects of our budgetary process and make recommendations.
With the spending review we need also a change of culture. It was astounding that the full 15 days of budget debate were completely monopolised by daily ritual of complaints from MPs that expenditure in line item X and line item Y were less than last year. Apart from the incorrectness of some of these claims, what is disturbing is that underlying culture that more public expenditure is better and that less is bad. Is that the feeling of the taxpayer?
What we require are better quality public services, better health, better education and better transport and not more and more spending. For this, government is to blame. If we are to change our mentality we need to produce and publish output indicators in line with expenditure statistics, which are merely input indicators. What is the average wait for a hip replacement, how long does it take you to arrive at work, how much have we cut the illiteracy rate and so on? From there we can then tackle efficiency in a proper manner.
Energy
The second priority is a non-fiscal structural measure. It is the diversification of our energy sources. Few realised over the years what this was costing the country. The only symptom we could observe was the exorbitant utility rates, which were making Malta less competitive. The government’s energy plan is now awaited by all but more so by our industry. Hopefully we would have learnt a few lessons.
An associated issue is the restructuring of our national enterprises Enemalta (and by extension Airmalta). We have enough experience to realise that left to rot they can drag the country down with them. Government’s contingent liability is burdened by their debt. Any strategic alliance, which spreads the debt burden and injects more dynamism and efficiency, as will be the case for Enemalta, is most welcome.
Output potential
The third priority is to raise the output potential of our economy allowing the country to achieve the highest possible rates of economic growth. We can do that by improving on the three basic ingredients, namely the labour force, its capital stock and its productivity.
Our labour force is suffering on both quantity and quality fronts. In terms of numbers we have much more inactive people than active ones. The numbers who register is a red herring here. We need to encourage all able-bodied persons to contribute to Malta’s livelihood whether they register or not. At the least we require nearly half the Maltese population to be at work and support the other half, no different from most of the advanced countries in Europe. We are quite far from that benchmark. The World Economic Forum just puts our labour participation rate as 102nd among a ranking of 122 countries. The blitz of measures in the Budget aimed solely to make work pay is meant to start our climb up that ladder for some years to come.
As for the quality, the data speaks for itself. While we suffer a dearth of scientists at the top-end, we have an unacceptable mass of semi-illiterate school-leavers entering the labour market each year. We need to find the causes why we are trailing most other countries and address the various problems. Again here the Youth Guarantee’s underlying message, which is being pushed by the EU is that society’s responsibility goes beyond the school and should ensure that a solid bridge to productive work is in place.
We now come to the adding to the country’s capital stock, that is, investment. Here again we very naively boil it down to the setting up of a package of so-called incentives, get Malta Enterprise to sell it round the world and presto judge any success or failures on one or the other. This thinking cannot be more wrong.
Business investment, like fruit, needs a particular environment to grow and survive in. There is an international literature pointing to the criteria investors use to locate in a particular country. The criteria are in fact utilised by reputable international institutions, like the IFC of the World Bank, the World Economic Forum and closer to home the Ernst and Young Attractiveness Survey to compare us with our peers or against ourselves over time.
The criteria we are judged by are the efficiency of our institutions, our infrastructure including the ports, our macro-economic environment, our work-ethic, access to finance and on and on. This is the real incentive package we have to sell ourselves with.
Incidentally the top four most problematic factors for doing business in Malta according to the World Economic Forum are Inefficient government bureaucracy, Access to Finance, Inadequate supply of infrastructure and Insufficient capacity to innovate. Addressing these key national issues will go a long way to increase the current low investment ratio to create jobs.
This is not to say that particular attention should not be given to SMEs and perhaps in our case micro-enterprises. Successful schemes such as Micro-Invest, Jeremie and Micro-Guarantee, which have been suggested under various EU-funded programmes, will be promoted irrespective of the funding source.
In this respect the government is noting the complaints from various SMEs and their representative constituted bodies that the prevailing low interest rates in the euro area are not fully percolating down to the end users of credit. In view of this consideration, government is requesting the Malta Financial Services Authority and the Malta Competition and Consumer Affairs Authority to examine the interest rate pass through and to put forward their recommendations. Similarly a gap analysis is to be undertaken by the Ministry in order to set up the appropriate structures to ensure consumers are given a fair deal and a fair hearing when it comes to buying financial products.
About productivity we could speak volumes but essentially it deals with better quality inputs both in human and capital resources, but more importantly the addition to that endogenous body of knowledge, which takes us to higher levels of production and consumption. This requires the right incentives for the country to innovate and to change, and at the same time an effective protection to those who innovate to earn a fair return on their investment.
Diversification
The fourth priority so essential to a small open economy is for the economy to continuously diversify into new markets, new continents and new sectors and new products. This applies to manufacturing, utilities and financial services. Next year a special focus will be on the maritime industry, which has ample space to develop further. We cannot afford to rely on any particular country, region or product for even a small shock will become a tsunami for this small island. The EU will remain our family but this should not preclude us in looking elsewhere to do business.
Fighting bureaucracy
The fifth priority, which has been fleetingly referred to is to attack bureaucracy with all our might. Like a weed it grows silently and grinds all activity to a halt. Like a transport gridlock it maddens business because they are not able to cut across. That is why international business will look elsewhere, while local business especially the small ones will go underground. It is their way of surviving. None of these choices are any good for the economy. By recognising this phenomenon and creating a unit to fight it, we can make a start by bringing it to the surface. Again this would be an ongoing battle, like the gardener’s job to prune and clear the weeds on a regular basis.
Social justice
The sixth priority for government is to place every social service on strong foundations to ensure its sustainability. At the same time you place enough incentives to send a clear message that for able-bodied people benefits are temporary and work is a better place to be. Our programme for the coming year will see this new way of thinking taking root by tapering benefits rather than cutting them abruptly when taking up a job.
Beyond that we then ensure that real poverty should not be tolerated by the state. Again here the complex problem needs to be tackled on many fronts. Let us not go for simplistic solutions. There aren’t any.
Economic outlook
Today as the first signs of recovery continue to gather momentum, Malta continues to perform well in terms of the main economic indicators. Economic growth continues to be well above the euro area average, highlighting Malta’s positive external performance driven in particular by a number of key sectors, including financial services and tourism. In fact, real GDP grew by 1.8% in the first quarter and rose to 3.6% in the second quarter of this year. This positive economic growth had a favourable spill-over effect in the labour market as according to Eurostat figures our unemployment rate, currently at 6.4%, is among the lowest in the European Union. Similarly, the Maltese economy reached a record of 3.6% growth in employment marking the highest growth rate in Europe. In addition, the rise in the cost of living is gradually slowing down, where the annual inflation rate for October dropped to 0.5%. The challenge is now to ensure that the Maltese economy maintains this momentum, with growth achieved translating into employment opportunities.
That was by the way a small interval meant to pep you up! I will now turn to our fiscal outlook and guide you among the maze of what the Commission actually said or what it meant to say.
Fiscal outlook
My Ministry is at present very much focused on the fiscal front. Despite having entered the Excessive Deficit Procedure earlier this year, government is determined to achieve a deficit for 2013 that is below the 3% threshold. In fact, the deficit is forecasted to decrease to 2.7% from 3.3% in 2012, and will drop further 2.1% in 2014.
In compliance with the EDP my Ministry prepared a set of documents, which were sent to the Commission at the beginning of October, while two weeks later we sent in the Draft Budgetary Plan for 2014.
Specifically, in the assessment of the report for real effective action taken to address the deficit for 2013, the Commission concluded that Malta had indeed taken effective action to address the budget deficit and that no further steps in the excessive deficit procedure are needed at present. Similarly, the Commission was satisfied with the set of fiscal-structural reforms laid out in Malta’s Economic Partnership Programme which contain in more detail how the government’s set of priorities, namely the ones I delineated to you, are meant to become operational. Of course the Commission is very cautious in its wording and therefore states that these are still work in progress and that various kinds of risks may lie ahead. But overall an objective reading of the report gives the government some comfort that it is addressing the most important issues for achieving a growth friendly consolidation and a sound fiscal position.
A week ago the Eurogroup met for what was termed a historic occasion where the 17 finance ministers of the Eurozone co-ordinated their respective budgets and promised to follow the advice of the Commission on what actions have to be taken in this regards. Very tellingly the Report, while recognising that Malta together with Spain, Italy, Luxembourg and Finland are at risk of non-compliance with the rules of the Stability and Growth Pack, states and I quote, “We welcome the full commitment to address this risk and take note of additional measures which have been recently taken in the case of Malta”.
In the case of the other countries in the group these are to be taken soon.
And yet underlining all these reports is the bare fact that our calculations and the Commissions are not tallying; which is a serious concern. Somebody is making a mistake. In my intervention in the Eurogroup meeting I stated that I just hope that the end of the year financial data for Malta as reported by the Treasury would resolve the issue. Then we are dealing with factual data and not forecasted one. If we are proved right then the whole base will shift and the Commission’s forecasts will be revised in the winter forecast next February.
At present, the latest Central Government Financial data presenting the state of public finances from January to October 2013 are reassuring as they suggest that both from the revenue and the expenditure side, we are currently on track. In fact, actual recurrent revenue is €2.8m higher than forecasted, offsetting an expenditure that is €1.2 higher than that forecasted and leaving a positive net effect in the consolidated fund balance where the actual consolidated deficit is €1.6 lower than that projected. We need to continue on this path towards the end of December and for certain revenues well into February in view of the time adjusted method accrual system which my Ministry opted for in the past.
At this point little can be said except that one cannot but note that when assessing the draft budgetary plan for 2014, the Commission remarked that there are still risks in view of past incidents of slippages in the public sector wage bill and in intermediate consumption, and instances where net capital expenditure was lower than planned as it was used to compensate for slippages in budgetary execution. The Commission has no other choice than to view Malta warily. However, government is determined to make a break with the past and work to rebuild Malta’s credibility with the Commission on the fiscal front.
For the year 2013, the discrepancy between the government’s and the Commission’s deficit projections is mainly attributable to the fact that the Commission are forecasting lower growth for current revenue, in particular in indirect taxes.
Whereas for 2014, the difference between the two institution’s fiscal forecasts is explained by the base effect from a different deficit projection for 2013, the unavailability of the 2014 budgetary measures during the evaluation and more important a lower estimation of revenue elasticities. We will keep you posted.
Financial services
On banking and finance I here concur with what the Governor rightly pointed out in his speech, that Malta can pride itself of having a sound and stable banking system, and thriving financial services industry.
In the wake of the European sovereign debt crisis, the regulatory framework within which the financial services industry operates came under close and intensive scrutiny. Thus, increased efforts were directed towards modifying the existing regulatory framework; this included the constant addition of new regulations and the modification of existing regulations in order to reflect the increased complexity of financial institutions in the present global economy.
Locally, the financial services industry has to set aside significant resources as investment in terms of time, money and human resources to cope with new regulations since the asset management industry faces new requirements through the forthcoming AIFM and EMIR Directives. The banking sector is also preparing itself to take CRD IV in its stride. Meanwhile, the insurance industry has finally seen some clarity on Solvency II as it has a two-year timeframe within which to embrace the Solvency II challenge for day one compliance. In parallel, the FATCA regimes as well as the Anti-Money Laundering fourth Directive are other developments, which financial services operators must follow closely.
However, increased regulation does not mean that there is no room for innovation. On the contrary, new legislation offers new opportunities, which could be more challenging and exciting. In this new regulatory landscape, players within the financial services sector must look beyond their traditional business model and understand where the sector is heading within the next decade.
In this context, one cannot but recognise the efforts of a number of successful financial practitioners who had the foresight and the mettle to push on and be innovative to get where we are today. The funds industry for example has been able to move from fund registration services into fund administration, fund management and custody, in a few years. Meanwhile, the insurance sector has succeeded in linking up with the captive insurance world to offer insurance management services of international calibre. Further developments have later allowed for the incorporation of the first real onshore structures. In establishing a framework for the Protective Cell Companies (PCC) and ICC regimes, Malta became, and still is, the only EU member state enabling the incorporation of such structures.
On its part, the banking sector got involved with its own wealth management products as well as providing much-needed support to new financial operators, while others branched out into the international market, helped by local conditions that favoured inward investment and know-how transfer.
Furthermore, changes in legislation allowed trust services to flourish in an environment that was previously not so familiar with the concept, while deft footwork opened up new prospects in the pensions business. In addition, advances in technology including the European legislation promoting digital integration in the financial services market and the growth of Malta’s ITC-based economy, also created the ideal conditions for the development of a payment services and electronic money industry.
Banking Union
The Maltese government recognises that for the Banking Union to be complete, and for reasons of financial stability for both euro area and non-euro area participants, it is important that a backstop arrangement is available for both groups of participants. The Banking sector represents a key pillar of the Maltese economy and therefore we are taking discussions on Banking Union very seriously. We agree that the three pillars of the Banking Union should be in place and have a complete package to stabilise the banking system and protect the depositor. In this regard, we fully support the establishment of a Single Supervisory Mechanism and the establishment of a European Resolution Authority, and we look forward to participating in the negotiations. We are also looking forward to the conclusion of negotiations on the proposed Banking Recovery and Resolution Directive, and the Deposit Guarantee Scheme Directive, as these represent an efficient mechanism to resolve a crisis situation.
Today, there is a wide consensus on the need of reform and the need for a true Banking Union. It is in our best interest to prepare ourselves for the new landscape in which the sector will be operating.
As Malta and the rest of the euro area prepare themselves for the introduction of the Single Supervisory Mechanism, I am confident that the Central Bank of Malta and the Malta Financial Services Authority will continue strengthening the institutional robustness of Malta’s financial system. Government is committed towards strengthening the institutional set-up of the country and the recent revisions to the Central Bank of Malta Act are a testimony to this. The legal establishment of the Joint Financial Stability Board is a welcome addition to Malta’s institutional architecture. As financial institutions continue to prepare themselves for the SSM, positive developments have already been registered. However, there is no room for complacency and the new banking rules will further contribute to strengthening the robustness of the system.
With its strong fundamentals and reputation, Malta’s financial sector has the potential to continue growing and diversify. We are committed to the promotion of an increasing economic contribution of the financial sector. Government also believes in the further internationalization of the sector and in its potential to act as a regional financial hub. Our vision and policy for financial services is to increase both the breadth and depth of its infrastructure by attracting a diversified investor base to our shores.
Overall, achieving the highest levels of corporate governance and ethical conduct across all sectors in our economy would also help us to earn the trust of investors which is key to growth in the financial sector both locally and internationally.
Ladies and gentlemen, although the global environment remains challenging, further opportunities for Malta’s financial sector do exist. Government is confident in the potential of the sector to continue being a major economic driver in Malta
For the financial sector to continue being competitive we also need to invest heavily in the human capital of the sector. As we continue to invest significantly in the educational sector, let me close by thanking our hosts, the Institute of Financial Services for its sterling contribution in this area. It is not only a partner with government in achieving our vision for the financial services sector but a protagonist.