Dodg­ing a hot air bal­lon econ­omy

To­mor­row is bud­get day and I re­mem­ber be­ing in­vited some weeks ago to the Pre-Bud­get 2018 Con­sul­ta­tion Busi­ness Break­fast meet­ing. Min­is­ter for Fi­nance Prof. Ed­ward Sci­cluna de­liv­ered a pre­sen­ta­tion which out­lined that over the last four years the is­land

The Malta Independent on Sunday - - BUSINESS & FINANCE - Dovile Kurtinaityte

These pos­i­tive fis­cal de­vel­op­ments are an im­por­tant achieve­ment in safe­guard­ing the longterm sus­tain­abil­ity of public fi­nance. A bud­get sur­plus en­hances the over­all credit rat­ing of the econ­omy, at­tract­ing more in­vest­ment in the coun­try. More­over, it al­lows more room for ma­noeu­vre in the drive to ad­dress other struc­tural chal­lenges and in­crease in­vest­ment in hu­man cap­i­tal and tech­nol­ogy.

Flex­i­bil­ity and open­ness are the char­ac­ter­is­tics and per­va­sive prin­ci­ples of to­day‘s eco­nomic pol­icy. Care­ful stew­ard­ship of the econ­omy has ren­dered Malta as the coun­try with a favourable busi­ness cli­mate, a hard-work­ing labour force, a com­pet­i­tive fis­cal regime en­dowed with cost ad­van­tages that also at­tract star­tups in many in­no­va­tive sec­tors.

The World Bank ranks Malta 76th in its Do­ing Busi­ness 2017 re­port, which cov­ers 190 coun­tries. Also use­ful to know is how Malta and com­par­a­tive economies rank on the ease of do­ing busi­ness: Italy ranks 50th, Greece 61th, Cyprus 45th, Spain 32nd, and Por­tu­gal 25th.

Pol­icy mak­ers of for­eign com­pa­nies wish­ing to mi­grate ap­pre­ci­ate this as a use­ful brand­ing for Malta mak­ing it stand tall in the ag­gre­gate rank­ing on the scale of ease of do­ing busi­ness. The Euro­pean Com­mis­sion Spring 2017 Eco­nomic Fore­cast an­nounced that in spite of po­lit­i­cal in­de­ter­mi­nacy and chal­lenges, the Euro­pean econ­omy en­tered its fifth year of moder­ate ex­pan­sion and is ex­pected to con­tinue per­form­ing pos­i­tively with growth in the euro area ex­pected at 1.7 per cent and at 1.8 per cent in 2017 and 2018, re­spec­tively.

Mean­while, the Fi­nance Min­is­ter in his pre-bud­get speech was con­scious of per­sis­tent chal­lenges in the ex­ter­nal en­vi­ron­ment which her­ald the need of con­tin­ued cau­tion in the fis­cal goals and the cre­ation of ad­di­tional buf­fers. It is good to hear that af­ter 30 years of an­nual re­cur­rent deficits, we have turned the cor­ner and the gov­ern­ment is pro­ject­ing a sur­plus of 0.5 per cent of GDP over the next three years com­bined with a struc­tural bal­ance which pro­gres­sively in­creases from 0.2 per cent of GDP in 2016 to 0.6 per cent of GDP by 2020.

The next im­por­tant is­sue is the fight against tax eva­sion and tax avoid­ance that are one of the top pri­or­i­ties of Euro­pean cit­i­zens, who ex­pect their elected lead­ers to de­liver on cru­cial re­forms. Prof. Sci­cluna said that com­bat­ting tax eva­sion is high on the gov­ern­ment’s agenda, adding that a joint en­force­ment has been set up in or­der to “have a se­ri­ous look at the In­land Rev­enue De­part­ment in terms of soft­ware and oper­a­tions”. The gov­ern­ment will ap­point­ment a new Per­ma­nent Sec­re­tary tasked with re­struc­tur­ing the rev­enue de­part­ment and help­ing it de­liver bet­ter re­sults. “We want a firm, tough but fair rev­enue de­part­ment,” he said.

The “Pre-Bud­get Doc­u­ment 2018 Up­grad­ing Malta’s In­fra­struc­ture” stressed on con­ti­nu­ity of re­cent past suc­cess, while also out­lin­ing new ini­tia­tives on in­fra­struc­ture in­vest­ments that com­ple­ment an al­ready pros­per­ous econ­omy. Much ground­work was achieved in the first leg­is­la­ture to en­sure that the econ­omy would have a solid foun­da­tion and thrive. These in­cluded fis­cal in­cen­tives for both busi­ness and house­holds, im­ple­ment­ing work pay ini­tia­tives, re­duc­ing the risk of poverty, so­cial ex­clu­sion and en­sur­ing that eco­nomic growth is in­deed en­joyed by all.

Not all this came at the ex­pense of sus­tain­abil­ity in public fi­nances. On the con­trary, the coun­try has suc­ceeded in pro­vid­ing solid growth-en­hanc­ing mea­sures while turn­ing the fis­cal deficit into a bud­get sur­plus. What are the main ob­sta­cles to eco­nomic growth? The an­swer will be ex­plained in de­tail on Mon­day when the bud­get pro­pos­als are tabled in Par­lia­ment. How­ever, we are guided by the Pre-Bud­get Doc­u­ment 2018 Up­grad­ing Malta’s In­fra­struc­ture pub­li­ca­tion. This an­nounced that growth in 2017 is ex­pected to be fu­elled by strong do­mes­tic de­mand, mainly on the back of pri­vate and public con­sump­tion ex­pen­di­ture. Pri­vate con­sump­tion ex­pen­di­ture growth is ex­pected to re­main sup­port­ive, fur­ther in­creas­ing by 3.6 per cent. The fly in the oint­ment is con­trol­ling waste and up­grad­ing the frag­ile na­tional road in­fra­struc­ture.

In­vest­ment in projects will de- cline marginally by 1.3 per cent and 3.1 per cent in 2017 and 2018 re­spec­tively fol­low­ing a con­tin­ued base ef­fect in view of the large-scale projects in the avi­a­tion and en­ergy sec­tors which came into fruition through­out 2015.

On the ex­ter­nal side for 2017, ex­ports are fore­cast to in­crease by 3.4 per cent thus out­pac­ing growth in im­ports which is ex­pected at around 3.2 per cent. The good news is that next year ex­port growth is ex­pected to ac­cel­er­ate to 4.4 per cent.

On bal­ance, the sim­u­la­tion ex­er­cise com­pleted by the min­istry shows that risk is skewed to­wards the up­side for 2017 and 2018, re­flect­ing the pos­si­bil­ity of stronger than an­tic­i­pated tourism and re­mote gaming growth, stronger pri­vate con­sump­tion and in­vest­ment growth, as well as an ac­cel­er­ated global eco­nomic re­cov­ery. Global growth in re­cent decades has been led by emerg­ing Asian economies, whose in­creas­ing de­mand has sup­ported the growth of de­vel­oped coun­tries.

His­tory has shown, how­ever, that growth in such coun­tries tends to slow as they be­come richer. It is un­likely that the emerg­ing coun­tries cur­rently growing rapidly will es­cape this fate. Only a few have man­aged to grow very fast for long. China’s growth is be­com­ing more con­sump­tion­based and the ser­vice sec­tor ac­counts for an in­creas­ing share of the econ­omy. Econ­o­mists tell us this is a nat­u­ral pat­tern par­tic­u­larly from the long-term per­spec­tive and is a pre­req­ui­site for sus­tain­able de­vel­op­ment. Based on past ex­pe­ri­ence, it can be as­sumed that China’s growth is prob­a­bly slow­ing down, and this may have a sig­nif­i­cant im­pact on global growth. Sim­u­la­tion mod­els have demon­strated that the slow­ing of China’s eco­nomic growth would con­sid­er­ably af­fect the ex­ports of de­vel­op­ing coun­tries. This would mainly have an im­pact on pri­mary pro­duc­ers, be­cause China is a ma­jor con­sumer of pri­mary prod­ucts. How­ever, pri­mary pro­duc­ers are the tar­get ex­port mar­ket for the in­dus­trial sec­tors of de­vel­oped coun­tries, which would suf­fer in­di­rect losses due to China’s re­duced growth. It is there­fore im­por­tant to as­sess how such global pat­terns im­pinge on Europe.

Mean­while, the fore­cast for the United States of Amer­ica points to sta­ble growth, but this may peak by end of year in the wake of the ex­pected in­crease in in­ter­est rates and the risk of shifts to­wards a more pro­tec­tion­ist trade pol­icy. Fur­ther­more, in cen­tral Europe there is mar­ket un­cer­tainty re­sult­ing from Brexit al­though so far the im­pact re­mains mod­est. In ad­di­tion, sev­eral emerg­ing mar­kets and oil ex­port­ing economies still face chal­lenges in ad­just­ing to weaker oil and com­mod­ity prices. Lastly, it is no­table that geopo­lit­i­cal risks in the Mid­dle East and East Asia have in­ten­si­fied in re­cent months thus rep­re­sent­ing a long-stand­ing medium-term risk to re­cov­ery. These ex­ter­nal fac­tors may have a nega­tive ef­fect in mar­kets where Malta ex­ports its prod­ucts.

In con­clu­sion, a bud­get sur­plus gives hope that the econ­omy is on the mend and its first pri­or­ity is to re­duce debt and ser­vic­ing costs that was a mill­stone around our necks for decades. When the state cof­fers are full, it is then wise to cre­ate a sovereign fund to make good for a rainy day when the eco­nomic cy­cle turns from boom to bust.

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