The context in which the 2020 Budget will be announced is one in which economic growth continues to be significant, unemployment is at historically low levels, and fiscal pressures are at manageable levels. Other undeniable realities that the Minister of Finance will be considering are the growing social stress brought about by strong economic growth and the uncertain prospects for the global economy.
The pre-Budget document for 2020 ‘Sustaining Inclusive Growth’ attempts to calibrate the government’s economic and social strategies to ensure that as many people as possible share from the fruit of an excellent economic harvest. It also attempts to mitigate some of the adverse effects of fast growth on Maltese society.
The crucial macroeconomic performance indicators in 2019 are likely to continue to be as impressive as in the previous year. In 2018, the Maltese economy registered a growth of 6.6 per cent in real terms, 4.7 percentage points higher than that of the EU. Domestic demand remains the main engine generating this growth as the country has achieved almost full employment.
On the fiscal side, Malta is well within the Stability and Growth Pact parameters with a surplus of two per cent registered in 2018 while the national debt has been reduced to 46 per cent of GDP. Despite planned substantial capital investment, the government is forecasting a fiscal surplus of one per cent over the medium term.
Calibrating an economic engine that seems to be working well is a tough challenge. The pre-Budget document confirms the government’s intention to encourage growth in e-gaming, blockchain technology and Artificial Intelligence. Regulatory and fiscal incentives can boost growth in these innovative sectors, but the risk of international fiscal reform can blur the long-term sustainability prospects of these economic activities.
The tourism industry is expected to continue to perform well, mainly thanks to low-cost airlines. The pre-Budget document confirms that the tourism strategy will “be guided by a drive to improve quality, competitiveness and innovation”.
It seems that the pressures that the growing number of tourists is exerting on the country do not worry policymakers in contrast to the concerns expressed by industry operators about the effects of over-tourism.
While the economic strategy seems to be built on the maxim of “more of the same”, the new emphasis on social strategy focuses on improving the quality of life of people and bridging the widening income gap in society.
Once again, the 2020 Budget is likely to increase expenditure on education. This expenditure is understandable as ultimately the educational achievement of Malta’s youth is what will make the country competitive. However, the management of the educational system continues to be mediocre at best.
Despite some improvements in the last decade it will take more than additional expenditure to improve it.
The commitment to invest more in social justice and inclusion is critical to reducing the risk of more people being caught in the poverty trap.
While significant improvement has been achieved in the reduction of the number of people at risk of poverty, there are emerging negative factors that need to be addressed with some urgency.
Social and affordable housing availability continues to be scarce. So far tactics contemplated in recent budgets to mitigate this fundamental problem have not produced impressive results.
The inflow of foreign workers to support economic growth creates challenges that are not analysed adequately in the pre-budget document. The pressures that substantial migration is causing on the physical infrastructure, the health and educational system and the housing market can only be mitigated by substantial investment in these sectors.
The 2020 Budget will introduce welcome measures, including more investment in social housing, the upgrading of primary health services and the mental health hospital, and more investment in road improvements. However, the gap between what needs to be done and what is likely to be done in the coming few years will continue to grow as people’s expectations are indeed high.
The word ‘quality’ is repeated several times in the pre-budget document. This emphasis probably reflects the government’s acknowledgement that people are beginning to take economic growth for granted. They now have higher expectations linked to their well-being.
The quality of life indicators include the soundness of the physical environment, the level of public service they receive from government entities, and the proper functioning of independent institutions and regulators.
Calibrating and synchronising the economic and social strategies for the coming years is indeed the Holy Grail of every finance minister.