I was recently in Germany for a few days. True to my nature, I like talking to the locals whenever I get the opportunity. Indeed, after the first couple of chats, it became unequivocal that the general mood of the German people towards their economy has changed. They are being badly affected by the increase in energy costs as a result of the sanctions on Russia and also by the slowdown in China’s economy, being one of Germany’s largest export markets. However, what impressed me mostly is that many Germans expressed anger at the lack of foresight of their political leaders, that they did not diversify enough Germany’s economy from precision engineering and heavy industry, towards more specialised service industries especially those related to technology.
I was impressed that in many instances many Germans had not stopped at just discussing the present economic situation at a superficial level but had given some thought as to what should have been done to have their economy become more resilient. In a way, I couldn't help but notice the stark difference between the analysis which the German people are doing as they go about their lives and the analysis which we do locally in our day-to-day lives. The main popular drift when speaking about economic matters in Malta is based on the here and now only, at a rather superficial level, which prevents us as a nation to have a hard look at ourselves and accept the reality staring at us.
As the saying goes, “there is none so deaf as those who will not hear". This became more evident following the latest report issued by the Malta Fiscal Advisory Council on 19 December, which published an assessment report on Malta’s 2024 Budget. What this report said heavily echoed the IMF’s analysis published last November.
The Malta Fiscal Advisory Council clearly outlines that rather than boosting economic growth by boosting domestic demand and private consumption, in a period where we have full employment, a tight labour market and inflationary pressures, we should seek to base economic growth on growing our exports and thereby safeguarding and improving our competitiveness and productivity. To achieve this, we need to address the skills’ gaps and make sure that our businesses become more efficient and sustainable. This also lies at the core of the IMF report.
The Malta Fiscal Advisory Council report also outlines that we need to be more prudent in our fiscal policy and rather than amass annual public deficits to the tune of €1bn per year, we should be working on building “fiscal buffers”. This is yet again echoing what the IMF report has said when it outlined that “Malta is a small, open, island economy particularly exposed to external shocks, with growing spending pressures to address climate change and infrastructure needs. Accordingly, building larger fiscal buffers, above current levels, is essential to strengthen the economy’s resilience”. The Malta Fiscal Advisory Council report went so far as to say that the “government should avoid inflating government spending, especially that which is not productive”.
Yet again, just like the IMF, the Malta Fiscal Advisory Council recommends that Malta is to set an exit strategy from the present blanket subsidies on energy and fuels, towards a more targeted subsidy system, while incentivising energy saving practices.
In essence, both the IMF report and the Malta Fiscal Advisory Council report, are advising us that we need to change our fiscal policy stance and adapt our economic growth model. An expansionary fiscal policy in inflationary periods is counterproductive to bringing inflation under control. Some had politically dubbed the IMF report as a report from some people that did not know Malta’s particular economic make-up and did not have Malta’s interest at heart. Given the meticulous methodology used in having such IMF reports compiled, it is incontrovertible, nothing could be further from the truth. Indeed, the Malta Fiscal Advisory Council came out with a similar analysis. Certainly the Council, being made up of leading Maltese economists, surely has Malta’s best interests at heart.
Friedrich Wilhelm Nietzsche, the 19th century German philosopher, was quoted as saying that “sometimes people don’t want to hear the truth, because they do not want their illusions destroyed”. Notwithstanding how hard we try to hold tight to the illusion that we will avoid any pain by throwing money at things, we will likely realise, at our great cost, that kicking the can down the road comes with a huge bill.
If there is anything that I really wish for all of us in 2024, is that we all come together as a nation, in a mature way, for the genuine good of our country, to truly address the challenges facing us. It is only through such needed maturity that hard and correct decisions are taken.
Silvan Mifsud is director at EMCS Advisory and also a council member
of The Malta Chamber