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
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.