The economy in Malta is currently so active that it may seem to be on the verge of overheating, but Finance Minister Edward Scicluna, who announced the 2019 Budget on 22nd October, believes that Malta is simply catching up to the major economies within the EU. “Overheating happens when demand is allowed to overtake supply across all sectors. The most obvious example of this is wage inflation. There will always be some element of this present, and there are signals which, if not addressed, can lead to overheating, but it doesn’t mean that the whole economy is overheating.”
Rather, he says, Malta’s target is convergence with the rest of Europe. “You cannot get convergence by growing at one or two per cent, because that’s what the advanced countries are doing. You need to have a higher rate,” he says. “I think every worker in Malta would like to have the kind of salary they would have in France or Germany, which they currently don’t. But hopefully one day, they will. The way to do it is to grow at a higher rate than the other economies which are already there – at four or five per cent. And that level of growth needs labour force.”
The Finance Minister continues by saying that foreign workers were coming to Malta because there are vacancies, not the other way around. “Since the economy is expanding fast, there are job opportunities here which they don’t have in their own countries. If there weren’t these opportunities, they wouldn’t come.”
He adds that much has already been done to tackle the issue of labour shortages. “Malta cannot get bigger. We can only increase the labour force participation rate. I still remember when we were talking about 2020 targets, which were in the low 60s. Now, the participation rate stands at 71 per cent. We have raised the bar higher and higher thanks to measures such as free childcare. We’re now closer, not to the EU average, but to the labour force participation rate of some of the most advanced countries in the EU. That’s when you reach the saturation point. Then, there’s the question of skills, which we are working closely with tertiary education institutions to address.”
On the other hand, he explains that while there are no plans to ‘put the brakes’ on the economy, it won’t be ‘fanned needlessly’ either. “When the economy is down, you need to pump it up, but when it is up, you don’t need to fan it needlessly, you just have to keep it ticking. You need to keep it going at cruising speed, maintaining altitude, and that’s enough.” Indeed, Prof. Scicluna affirms that ahead of the Budget, the Finance Ministry was subjected to all sorts of pressures from different entities trying to push measures which would ‘fan’ the economy, but many of these were rejected. “It’s the act of managing the economy. You have to ensure that you keep it on an even keel. It’s a daily chore.”
Prof. Scicluna also confirms Government’s plans to continue restoring public holidays which fall on a weekend back to workers as additional leave days, year by year. “This measure has been in the electoral programme from the very beginning, and it’s going to be spread across the legislature – one more day of leave per year. As an economist, I know that businesses don’t want surprises, but this is not a surprise anymore. They know it’s coming, they have time to adjust their costs, and when they come to the collective agreement, they will take it into consideration as well.”
That’s not to say that Government did not pay any attention to the needs of the business community in the Budget. Indeed, one of the most business-friendly measures was the launch of the Malta Development Bank’s (MDB) financial instrument in collaboration with a commercial bank and the Family Business Office, with the aim of facilitating the transfer of family businesses to ensure sustainability in this sector.
“In Malta, most companies are small-to-medium enterprises (SMEs) which are family-owned. When you transfer your business to your children, you’re hit with a five per cent duty. But we decided to give businesses the chance to do it at a reduced rate of 1.5 per cent, and that has been successful so far – so much so that it has been extended for another year. However, apart from that, what’s keeping some businesses from making use of this benefit is that the children who will inherit this business need money. The MDB can provide the guarantee that the inheritors need on the transaction, or the loan, and the commercial bank will provide it,” he continues.
The controversial Malta Individual Investor Programme (IIP) and the Residence and Visa Programmes naturally played an important role in the 2019 Budget, as they have done for the past three years. These lucrative schemes are contributing significantly to Malta’s year-on-year surplus, and the Budget speech included the pronouncement that they would be strengthened and extended for another year. But while Prof. Scicluna doesn’t see any reason to stop them, he doesn’t believe that Malta is overly-reliant on the profits of these schemes either.
“There’s no reason to believe that while other countries – at least half of the EU – have such schemes in place, we should stop them. However, we have voluntarily put at rest any concern about Malta relying too much on the IIP and Visa programme. After we presented our accounts and found that there was a surplus, we removed all the revenue that came from the IIP. Was there still a surplus? The answer is yes. This shows that Government can live within its means and contain its expenditure. We’re not saying the IIP will disappear, but if it were to happen, we are prepared for it,” he maintains.
The 2019 Budget also announced the establishment of a competitiveness board within the ambit of MCESD, with a specific financial allocation aimed towards further economic development. Is Malta at risk of becoming uncompetitive? “Malta is doing very well,” Prof. Scicluna says firmly. “I believe we are very competitive, especially when it comes to prices, inflation and productivity; however, I would not rely on the present situation. You have to be careful with the economy, guard it, monitor it, supervise it all the time. If we slip, we can easily lose our competitiveness in tourism, iGaming or manufacturing, so we’re not going to sit and say ah, this is forever. Nothing is guaranteed. I’m very proud of the fact that we are setting up this unit to ensure this. While we have had informal boards of this kind in the past, this will be a more permanent institution within the MCESD, connected to a network all across Europe.”
Prof. Scicluna also expresses his enthusiasm about the survival of Air Malta, saying that its only option is to expand, with further investment in new aircraft and new routes added to the airline’s schedule. He concludes by giving a succinct summary of what he believes to be the outlook for Malta’s economy in 2019: “if your investment today is satisfactory, and if there is a lot in the pipeline – which there is – the outlook is bright. And I believe it is.”
A version of this article originally appeared in The Malta Business Observer