Malta Employers Association proposals for Budget

The National Budget for 2021 has to be approached within the context of two major events that will have an impact on Malta during the fourth quarter of this year. These are COVID-19 and the Moneyval Assessment.

COVID-19

Firstly, the fiscal performance and projections for 2021 will depend on the extent to which the COVID virus will be contained. Like other economies, Malta was affected by the onset of the pandemic: “The effectiveness of this package will depend on the business response to these fiscal injections, and also on the need to strictly enforce public health measures to keep the numbers of infected persons to a minimum and thus prevent a relapse which will be damaging and costly.

Government is urged to maintain contact with the social partners to exchange information so that the situation will be monitored continuously, and further measures that extend beyond September may be discussed to reflect the prevailing situation.”

This statement reflected the concerns of many businesses that endorsed the concept of opening the economy while reducing the risk of a spike in COVID cases by adopting a prudent approach.

Unfortunately, a feeling of overconfidence, brought about by successive days of zero to negligible cases, combined with the lobbying of organisers of mass events has clouded government’s judgement. The strategy to open up to mass events in lieu of attracting safe and controlled tourism niches has backfired and jeopardised the gains made through so many sacrifices by businesses, employees and the health authorities.

This led the Association to state that: “Authorising mass events like parties and feast marches is ridiculous and risks reversing all the gains made against the spread of the COVID virus in Malta.”

This error of judgment is now having a cascading effect on the economy. Many countries are closing their doors to Malta, hotels are dealing with numerous cancellations, the catering business is depending almost exclusively on domestic business, work places are having issues due to the increase in cases, health services are being stretched and schools may not open in September.

Under these circumstances, the budget will be dependent on the extent to which the country can manage to bring down the number of infections in the coming weeks and the possibility of a vaccine being developed and distributed internationally. If things remain unchanged, government revenues will continue to shrink and it will be under more pressure to extend its stimulus package to the economy.

This could result in a higher deficit than anticipated and a longer recovery time, placing more strain on government finances.

Moneyval

Any plans for 2021 will depend on the outcome of the Moneyval assessment. This is a critical factor which will have a strong impact on Malta’s reputation as a safe place to invest in sectors like financial services and i-gaming. It is accepted that Malta has suffered extensive reputational damage over the past years and that actions and reforms are required irrespective of the outcome of Moneyval.

The Association has expressed this sentiment in a public statement issued last July: “The only way in which we can get out of this hole is by acknowledging the gravity of the situation, putting aside tribal differences and to have a concerted effort to clean up our act by stamping out crime and corruption. We need to restore core values based on entitlement through hard work, solidarity and tolerance, and a business environment based on trust, enterprise and commitment.”

This has also to be evaluated within the context of MEA’s position paper: Parliamentary Reform

–Towards a More Productive Parliament, which addresses the need to have a more professional parliamentary set-up, better governance and a reform of political party financing. A clearance by Moneyval is a necessary but not a sufficient condition to restore Malta’s international standing.

The Global Economy

Both the COVID situation and the Moneyval issue exist within the wider backdrop of the international economy, which will slow down in 2021, and will therefore dampen Malta’s chances of reaching 2019 levels of economic activity. Yet this also presents an opportunity for restructuring. For years, we have heard about the need of long-term planning, to shift to sustainable economic activities with numerous statements and position papers presented by the social partners. It is time to look into these ideas concretely in order to shape the economy to provide higher value employment opportunities without the need to depend on an increase in population to sustain growth.

Outcomes

In all these scenarios, the likely outcomes are:

Low or negative economic growth Higher unemployment

A fiscal deficit that will persist in 2020 and 2021

Recovery in some sectors, tourism in particular will be slow and may extend to 2023. The severity of these outcomes depends on the scenarios as explained. This plots different outcomes for the Moneyval and COVID issues.

The options for Moneyval are: Greylisting or No Greylisting and the ones for COVID are: Increased cases, Decreased cases and Vaccine.

The interaction of these possible eventualities is graded according to their short- and medium-term negative impact. The possibilities range in impact. The worst eventuality is: High number of COVID cases together with a Moneyval greylisting, with predicted negative economic consequences both in the short- and medium-term. This outcome will result in major challenges for government finances, investment and employment. Recovery will take more than three years for most sectors, with major economic sectors: tourism, financial services, i-gaming and possibly construction being the most heavily affected.

At the other end, the introduction of a vaccine by the end of the fourth quarter, together with a positive Moneyval evaluation could place the economy on a fast track to recovery in 2021.

The other areas are based on permutations between the two events. For example, a positive Moneyval outcome with a drop in cases will result in a Code Blue in the shortterm but a Code White in the medium-term. This is because the impact of COVID will still be with us in the final quarter, albeit in control, and the medium-term threat to the financial services sector will also be minimal, subject to constructive follow-up.

Any fiscal projections will depend on these outcomes, coupled with the impact of the international situation. In all probability, government will have to extend the stimulus package which expires in September to at least another quarter, especially if the number of COVID cases remains high. Some businesses that have waited for the outcome of the summer months before taking decisions concerning employment levels might take action to downsize, leading to an increase in unemployment.

As the economy contracts, government may also find the cost of a bloated public sector more difficult to sustain and will be constrained to reduce manpower in areas where it has idle persons.

Conclusion

From the above, one can conclude that:

• the recommendations submitted to government for the June minibudget still stand;

• the stimulus package which expires in September will have to be extended for the final quarter of this year; and

Government must have contingencies in place to bear the brunt of any negative outcomes mentioned in this paper. It might be advisable to prepare an interim budget for Q4 and a budget for 2021 after the situation regarding COVID and Moneyval is clearer towards the end of this year.