A bid to boost competitiveness

The chairman of the Malta Council for Economic and Social Development yesterday published the proposed text for a social pact. Although the budget is being presented tomorrow, no agreement has been reached between the social partners over the proposals.

The draft of the social pact proposed:

Mission statement
This social pact comprises a consistent package of measures aimed at enhancing Malta's national competitiveness and upgrading its long term development in a manner which is sustainable from the economic, social and fiscal dimensions. It aims to attract investment, generate more and better employment opportunities and enhance social welfare and cohesion. It is the result of an active tri-partite dialogue between the social partners and is thus intended to improve the credibility of economic and social policy in Malta.

Duration
This social pact covers a period of three years starting January 1, 2005 to December 31, 2007.

Implementation
The social partners agree that the implementation of measures in this social pact is to fall under the scrutiny of the MCESD, which is to issue reports on a six-monthly basis regarding the progress in implementation and results achieved.

The social partners agree to submit a detailed plan of action regarding their obligations in the implementation of the measures agreed to in this social pact by March 31, 2005. The MCESD shall appoint working groups for this purpose as indicated in this document and as may be deemed appropriate in the circumstances, which shall report by March 31, 2005.

All the measures provided for in this social pact shall be implemented in toto as a consistent package. The social partners agree that the undertaking of policies, measures and actions concerning areas not covered in this social pact shall not compromise the agreements reached in this pact. The social partners recognise that this social pact opens the way to further social dialogue regarding areas of economic and social reform not covered by this pact, including the systems for the provision of public health services, pensions and welfare benefits.

The formulation of the social pact is the result of the healthy social dialogue, trust and good will that exist among the social partners. It is expected that the same spirit will be carried over to the implementation phase of this social pact. Difficulties that may arise in the implementation of this social pact shall be dealt with within the MCESD, which shall continue to serve as the tri-partite forum for social dialogue.

Objectives
The social partners expect that, subject to the conditions characterising the economy particularly those prevailing in the international markets, this social pact shall be conducive to achieving the following objectives by the end of the period of its implementation:

to improve economic competitiveness through a reduction in the unit labour cost of production in Malta of the order of two per cent, achieved by stimulating work and economic activity and by implementing an appropriate wages policy which builds on the current framework of responsible and effective enterprise-level negotiation;

to sustain social cohesion and further improve the social fabric through the development of human capital, reflected in a projected net increase in employment of 4,500 full-time equivalent jobs, and;

to contribute, together with other policies and measures which are not covered by this Social pact, to reduce the annual fiscal deficit to around Lm30 million (1.5 per cent of GDP) in a manner which is conducive to promote competitiveness, engender macroeconomic equilibrium and restore fiscal policy as a tool of macroeconomic stabilisation.

Measures
In pursuit of these objectives, this social pact provides for 22 measures categorised under four broad headings, namely:

stimulating work and economic activity; wages policy; development of human capital, and; taxation and government expenditure.

Stimulating work and economic activity
In order to stimulate work and economic activity, this social pact provides for the following measures.

The annual vacation leave entitlement shall, in 2005 and 2006, be 2 days lower than that in 2004, and in 2007 be 3 days lower than that in 2004. This measure is intended to enhance the competitiveness of wage levels in Malta through an increase in productivity per worker.

The first four hours of overtime per week are to be remunerated at normal rates of pay. This is subject to a maximum of 100 overtime hours per year which can be remunerated at normal rates of pay, and subject to the condition that the overtime hours remunerated at normal rates of pay shall in any week not exceed one-half of the total overtime hours worked. This measure is intended to encourage flexibility in working practices while restraining increases in the cost of labour.

A number of public holidays can be replaced by optional days of vacation leave following consultation with political parties, ecclesiastical authorities and other interested entities. This measure is intended to reduce the costs associated with the interruption of the working week and with the remuneration payable outside the normal period of work. A working group appointed by the MCESD shall undertake consultations in this respect.

The application of part-time tax benefits shall be available to both members of a married couple in the case of a joint tax computation. This measure is intended to remove a distortion from the income tax system and will serve as an incentive for increased labour market participation, especially by women.

Government shall implement measures to effectively enable the provision of quality child care. This measure covers aspects of regulation and financial incentives towards this activity, and is intended to promote increased labour market participation, especially by women.

Government shall implement measures to effectively eliminate abuses in invalidity benefits. This measure is intended to retain older workers in the labour force while reducing government expenditure generated by abuse.

There shall be an effective reduction of excessive regulation and bureaucracy within the public sector. This is to be achieved through a formal process whereby new regulations and bureaucratic procedures are to be justified in terms of:

being the minimum necessary to achieve the desired objectives;

involving the minimum possible number of processing steps and time;

keeping any related fees to the minimum level possible.

A process to vet existing regulations on the basis of these criteria is to be implemented as well. The MCESD is to set up a working group to devise the best systems through which these objectives are to be achieved.

There shall be a reallocation of public research funds to a scheme involving partnerships between researchers and business. This measure is intended to deliver better economic returns to public resources devoted to research activities.

Flexible time schedules within the standard working week in the public sector shall be adopted. This is to apply in entities where this is required for the purposes of national competitiveness, and in agreement with the social partners involved at the level of the entity.

Wages policy

In order to further national competitiveness which leads to the creation of more and better jobs, this social pact provides for the following measures which build upon the existing system of collective bargaining based on responsible and effective enterprise-level negotiation:

Starting from January 1, 2006, wage increases in excess of the Cost Of Living Adjustment (COLA) are to be in the form of non-cumulative cash payments. This is to apply to all collective agreements in force at that date and at later dates within the duration of this social pact. Arrangements for collective agreements covering the year 2005 shall not be disturbed by this social pact, it being understood that collective bargaining processes currently under way and covering the year 2005 shall continue to be done in a responsible manner and which reflects the spirit of this clause. The COLA system is, for the duration of this social pact, to continue being applied as at present, with the adjustment being incorporated in the basic wage. This measure improves the existing system of enterprise-level collective bargaining by introducing more flexibility in wage determination. At the same time, it guarantees a minimum level of social protection through the award of the COLA. As National Insurance contributions as well as overtime remuneration rates are computed on the basis of the basic wage, this measure is also conducive to restrain the rate of increase of labour costs.

On January 1, 2008, non-cumulative cash payments awarded in 2006 and 2007 are to be incorporated, in part or in full, within basic wages according to the rate of economic growth achieved in the medium term, on the basis of the following formula:

This mechanism is intended to allow for the fact that the elements of labour compensation to be incorporated in the basic wage should reflect the genuine permanent improvements in productivity and market conditions.

The first Lm0.5 of the weekly cash payments awarded in 2006 and 2007 are to be free of income tax. This measure is intended to contribute to sustain the disposable income of workers.

For the purposes of the computation of the pensionable income for persons retiring between 2007 and 2009, the non-cumulative cash payments awarded in 2006 and 2007 shall be deemed to form part of the basic wage. This does not affect the revision of existing pensions, which shall be subject to developments in the basic wage as agreed in this social pact.

This clause does not compromise the implementation of any changes which may take place through a reform of the pension system, including the way in which the entry level pension is computed and subsequently revised.

The development of human capital
In full recognition of the fact that economic and social advancement, including job creation, hinges on the development of human capital, this social pact provides for the following measures aimed at improving training and education.

The system of unemployment benefits shall be transformed into one which effectively leads to the participation in the world of work. The principles of the envisaged scheme are as follows. Unemployed people aged 25 years or under shall be requested to take on placements, of a six-month duration, with firms in the private sector. The workers shall benefit from training and acquiring work experience, with the possibility of employment at the termination of the training period.

No wage will be offered to trainees who will continue to receive the unemployment benefit. Older persons who are unemployed will be offered training in order to acquire more marketable skills. Following the receipt of the unemployment benefit for six months, such benefit will be conditioned upon the person's participation in such courses. These schemes are also expected to lead to a reduction in the abuses on unemployment benefits. The precise mechanics of these schemes shall be derived by a working group set up by the MCESD in order to maximise potential benefits while removing any avenues for abuse.

Private sector employers shall contribute to a fund for the retraining of workers. The fund shall be managed by the MCESD. Private sector employers shall contribute Lm0.01 per employee hour worked to the fund. There shall be a partial exemption from this contribution for firms participating in the training schemes for unemployed persons aged 25 years or under. The precise mechanics of the operation of this fund shall be derived by a working group set up by the MCESD.

There shall be a reform of the system of funding of tertiary education in Malta and of the student stipends system. The funding of tertiary education shall be based on a formula reflecting costs and tied to agreed pre-established strategic criteria including the economic, social and cultural needs of the country. The formula funding can also extend to cover study in institutions outside Malta. A differentiated system of stipends shall be introduced, providing incentives for study in areas of major need.

Taxation and government expenditure
The social partners agree that fiscal consolidation based on expenditure control leading to enhanced competitiveness and a better macroeconomic balance shall be the primary objective of fiscal policy during the implementation of this social pact. Within this framework, this social pact provides for the following measures.

Government provides a commitment not to increase income tax rates and value added tax rates for the duration of the social pact. This measure provides a degree of certainty in industrial relations and signals the intention to pursue fiscal consolidation through the control of government expenditure.

Government shall extend the existing system of voluntary tax agreements based on benchmarking to all categories of self-employed persons. This will introduce more fairness in the tax system between employees and self-employed persons, and between workers in the self-employed categories. It is also expected to contribute to an increase in government revenue. Government is to present a plan for the undertaking of this measure by March 31, 2005.

Excess government employment shall be reduced through private-public partnership arrangements and incentivised individual voluntary redeployment. In principle, redeployment to private-public partnerships is to be effected on a compulsory basis within the parameters already established in the redeployment of public sector employees with the environmental landscaping public-private partnership and with conditions negotiated at the enterprise level. Government is to guarantee jobs for redeployed workers against the eventuality of enterprise dissolution for a limited time period. Individual voluntary schemes are to offer appropriate incentives for individual redeployment. The MCESD is to set up a working group to set the operational parameters of these schemes.

The increase in expenditure on the government wage bill shall not exceed one per cent per annum for the duration of the social pact. This is an essential element of the efforts towards fiscal consolidation, and is to be achieved by the redeployment of excess workers, changes in work practices, natural wastage and the necessary restraints in compensation increases.

Government shall undertake the reforms necessary to control expenditure in line with the fiscal consolidation target. In particular, all government expenditure of a non-variable nature is to remain fixed in nominal terms at 2004 levels for the duration of this social pact. This entails the undertaking of measures incorporated in this social pact as well as other reforms falling outside the scope of this social pact primarily concerning the reaping of efficiencies in operational expenditure, subventions and subsidies given to public entities, the health and social welfare systems and privatisation. The social partners agree to proceed with discussions on these areas within the MCESD.

There shall be more effective scrutiny of developments in government recurrent and capital expenditure programmes by the MCESD. This is to be done by means of a working group appointed by the council.

Negotiation of new social pact
The social partners agree to start negotiations on a new social pact in January 2007, with a view of deriving an agreement applicable as from January 1, 2008.