Lim­ited progress made in ad­dress­ing the 2016 coun­try-spe­cific rec­om­men­da­tions

The Malta Business Weekly - - FRONT PAGE -

This re­port as­sesses Malta’s econ­omy in the light of the Euro­pean Com­mis­sion’s An­nual Growth Sur­vey pub­lished on 16 Novem­ber 2016.

In the sur­vey, the Com­mis­sion calls on the EU Mem­ber States to re­dou­ble their ef­forts on the three el­e­ments of the vir­tu­ous tri­an­gle of eco­nomic pol­icy — boost­ing in­vest­ment, pur­su­ing struc­tural re­forms and en­sur­ing re­spon­si­ble fis­cal poli­cies.

In so do­ing, EU Mem­ber States should fo­cus on im­prov­ing so­cial fair­ness in or­der to de­liver more in­clu­sive growth.

Eco­nomic ac­tiv­ity has eased some­what, but re­mains buoy­ant. Real GDP growth was among the high­est in the EU in 2014-15, reach­ing 7.9%, driven by strong net ser­vice ex­ports, ro­bust pri­vate con­sump­tion and a surge in in­vest­ment, partly due to one-off fac­tors.

Growth eased some­what in 2016, but is fore­cast to have re­mained strong at 4%. Pos­i­tive de­vel­op­ments have also been ob­served in com­pet­i­tive­ness, the sus­tain­abil­ity of the ex­ter­nal po­si­tion and pri­vate in­debt­ed­ness.

More­over, em­ploy­ment growth is among the high­est in the EU, in par­tic­u­lar due to the ser­vices sec­tor. The un­em­ploy­ment rate has dropped to a record low of be­low 5%. Net im­mi­gra­tion flows helped to off­set emerg­ing skill gaps and labour short­ages.

Pub­lic fi­nances have also im­proved. Strong eco­nomic growth boosted tax rev­enues, in par­tic­u­lar di­rect taxes. Some ef­forts on the ex­pen­di­ture side have also helped to re­duce the struc­tural bud­get deficit.

The gross gov­ern­ment debt is es­ti­mated to have dropped be­low 60% of GDP for the first time since 1998. De­spite some progress, chal­lenges con­cern­ing tax com­pli­ance re­main.

Over­all, lim­ited progress has been made in ad­dress­ing the 2016 coun­try-spe­cific rec­om­men­da­tions. Mea­sures have been taken to im­prove the sus­tain­abil­ity of pub­lic fi­nances, par­tic­u­larly re­gard­ing age-re­lated bud­getary costs. The full im­pact of th­ese mea­sures on pub­lic ex­pen­di­ture, how­ever, is not yet cer­tain.

Some progress has also been made in strength­en­ing labour sup­ply by im­prov­ing ac­cess to and par­tic­i­pa­tion in life­long learn­ing, with a fo­cus on the lowskilled. Re­gard­ing the progress in reach­ing the na­tional tar­gets un­der the Europe 2020 strat­egy, Malta has made progress to­wards its tar­get on em­ploy­ment.

How­ever, there ap­pears to re­main a gap with re­spect to the tar­gets for re­duc­ing green­house gases, rais­ing R&D ex­pen­di­ture, in­creas­ing re­new­able en­ergy pro­vi­sion, im­prov­ing en­ergy ef­fi­ciency, re­duc­ing early school leav­ing, in­creas­ing the ter­tiary ed­u­ca­tion at­tain­ment, and re­duc­ing poverty.

The main find­ings of the anal­y­sis in this re­port and the re­lated pol­icy chal­lenges are as fol­lows: • De­spite the im­prove­ment in pub­lic fi­nances, some risks to long-term sus­tain­abil­ity re­main. The fis­cal po­si­tion has ben­e­fited from the strength­en­ing of rev­enues. Cor­po­rate in­come taxes have a higher weight in tax rev­enues than in the rest of the EU, im­ply­ing higher vul­ner­a­bil­ity to eco­nomic shocks In ad­di­tion, in the • • • medium to long-term hori­zon, in­ter­na­tional ini­tia­tives in the fight against tax avoid­ance could have an im­pact on tax rev­enues and the fis­cal po­si­tion of the coun­try. On ex­pen­di­ture, sus­tain­abil­ity chal­lenges re­main due to the pro­jected in­crease in age-re­lated bud­getary costs, in par­tic­u­lar in the health­care and pen­sion sys­tems. The fi­nan­cial sys­tem con­tin­ues to face some struc­tural chal­lenges. The sys­tem is char­ac­terised by a large num­ber of for­eign in­sti­tu­tions at­tracted to Malta also by a favourable tax en­vi­ron­ment. The ef­fec­tive su­per­vi­sion of in­ter­na­tion­al­ly­ori­ented busi­ness, how­ever, cre­ates some chal­lenges. In the bank­ing sec­tor, as­set qual­ity and the flow of non-res­i­dent de­posits may pose ad­di­tional risks for prof­itabil­ity and liq­uid­ity man­age­ment. Pos­i­tive labour mar­ket de­vel­op­ments con­tinue. Em­ploy­ment growth is high, help­ing to reach the na­tional Europe 2020 em­ploy­ment tar­get, and push­ing down un­em­ploy­ment to a record low level. Em­ploy­ment rates among women are in­creas­ing steadily, al­beit from a low level. They re­main low for older and lowskilled women, who con­sti­tute a sub­stan­tial pro­por­tion of the labour force, but the em­ploy­ment rate for young women has risen above the EU av­er­age. Poverty and so­cial ex­clu­sion risks are de­clin­ing but they re­main sub­stan­tial for chil­dren, the el­derly and the low-skilled. • Malta is ad­dress­ing the so­cial chal­lenges and strength­en­ing poli­cies for ac­tive in­clu­sion. In­come in­equal­i­ties are rather sta­ble and be­low the EU av­er­age thanks to low mar­ket in­equal­i­ties and the pos­si­ble re­dis­tribu­tive im­pact of the tax and ben­e­fits sys­tem. The lat­ter has im­proved as a re­sult of re­cent re­forms. he skills sup­ply does not yet ad­e­quately match labour mar­ket needs. Ac­cess and par­tic­i­pa­tion in life­long learn­ing have gen­er­ally im­proved, but labour mar­ket par­tic­i­pa­tion by the • low-skilled re­mains low. While ed­u­ca­tional at­tain­ment is in­creas­ing, the rate of early school leav­ing re­mains high and ba­sic skills at­tain­ment among young peo­ple is still weak. In re­sponse to tight­ness in the labour mar­ket, the re­liance on for­eign work­ers is in­creas­ing. This points to labour short­ages across a broad spec­trum of sec­tors and skills, pos­si­bly hin­der­ing in­vest­ment. Sus­tain­abil­ity of pro­duc­tiv­ity growth calls for a higher in­vest­ment in both knowl­edge and in­tan­gi­ble as­sets. Ma­jor steps have been taken to strengthen the re­search and in­no­va­tion sys­tem. Nev­er­the­less, room for progress in fill­ing knowl­edge and skill gaps is sig­nif­i­cant. In ad­di­tion, in­fra­struc­ture in gen­eral still faces chal­lenges. Fi­nanc­ing con­di­tions have im­proved, but ac­cess to ap­pro­pri­ate fi­nanc­ing in­stru­ments is needed to pro­mote new in­vest­ment. The au­thor­i­ties have made avail­able a broad range of mech­a­nisms for al­ter­na­tive fi­nanc­ing. Fi­nanc­ing in­no­va­tions in ser­vices and new busi­ness mod­els re­quire more di­ver­si­fied fi­nanc­ing in­stru­ments and ven­ture cap­i­tal in par­tic­u­lar. The Malta De­vel­op­ment Bank is be­ing set up to ad­dress th­ese needs as well as long term in­vest­ment projects. De­spite im­prove­ments, some in­ef­fi­cien­cies in pub­lic ad­min­is­tra­tion re­main. The rolling out of e-gov­ern­ment fa­cil­i­ties and the re­form of the plan­ning au­tho­ri­sa­tion process are ex­pected to en­able in­vest­ment. Nev­er­the­less, sig­nif­i­cant en­try bar­ri­ers for new firms re­main. The reg­u­la­tory en­vi­ron­ment for bankruptcy and a sec­ond chance for en­trepreneurs in fi­nan­cial dif­fi­cul­ties is still un­der­de­vel­oped. De­spite reg­is­ter­ing im­prove­ments in ju­di­cial sys­tem ef­fi­ciency, there re­mains sub­stan­tial room for im­prove­ment. In view of nat­u­ral re­source con­straints, cur­rent poli­cies do not ap­pear suf­fi­cient to achieve the goals re­lated to green growth and a cir­cu­lar econ­omy. There are signs that the ex­ist­ing phys­i­cal in­fra­struc­ture may be in­suf­fi­cient to cope with the cur­rent pace of de­vel­op­ment. De­spite im­prove­ments, the qual­ity of road in­fra­struc­ture re­mains a con­cern, lead­ing to heavy con­ges­tion. This gen­er­ates con­sid­er­able costs to cit­i­zens' wel­fare, op­er­at­ing costs for busi­nesses and en­vi­ron­men­tal costs. The adop­tion of the Na­tional Trans­port Strat­egy with a 2050 hori­zon and the Op­er­a­tional Trans­port Master Plan 2025 is a wel­come step to tackle the is­sues in trans­port.

Sim­i­larly, in en­ergy, the pol­icy strat­egy has fo­cused on se­cur­ing sup­ply and re­mov­ing the de­pen­dence on im­ported oil, but the achieve­ment of the na­tional en­ergy ef­fi­ciency tar­get re­mains a chal­lenge. The pro­mo­tion of re­new­able en­ergy pro­vides an op­por­tu­nity to ex­ploit do­mes­tic en­ergy sources. Im­prov­ing re­source ef­fi­ciency will be key for sus­tain­able growth given the very lim­ited avail­able re­sources. •

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