FOI calls for reconsideration of capping instrument

The Malta Federation of Industry considers the Budget for 2006 a budget with a focus. It also sets a policy direction that gives more space to the participation of the private sector in local economic activity. The budget recognises the need for business owners to concentrate on job creation and wealth generation.

In this context, it proposes a simpler and more streamlined regulatory framework. Whether or not this will result in a fundamental change awaits to be seen. The social partners therefore need to co-operate fully within a consultation exercise necessary if this reform is to succeed.

The 2006 Budget speech document also emphasises continued investment in public services and infrastructure especially those related to the education sector, such as MCAST and the University. Investment in these areas is essential for Malta to brand itself as an ideal and competitive business location based on excellent human resource development.

Efforts should be based on the maximisation of resources and the promotion of effective synergy between education institutions, local enterprise, and government.

However, the FOI cannot but view the 2006 Budget in the context of the recent increases in prices of water and electricity bills. The latter predominate all good intentions of the 2006 Budget and will have a strong impact on Malta's economic growth potential and the competitiveness levels of local economic sectors.

From a fiscal point of view, it is true that after years of very high deficits in public spending, it is difficult - politically - to push through effective cuts in expenditure and in some way this ties government's hands.

Whereas Government seems determined to reduce the deficit to GDP ratio to 2.3 per cent in 2006 and, in the long term, to reach a balanced budget, it must articulate its commitment that the fiscal targets for 2006 should not depend too heavily on one-off measures like the tax amnesties registered in 2005.

Government's determination looks beyond short-term political concerns to the genuine long-term needs of the country, with the full recognition that Malta cannot afford to drag deeper into debt, which ultimately takes more money out of taxpayers' pockets.

Given that government's expenditure on social policy approximates 24 per cent of GDP, the reform of the pensions system and health services needs to shift on the fast lane. In parallel, the Federation asks for serious measures that cut down on public sector costs and inefficiencies.

One of Malta's immediate concerns relates to the unit labour cost developments. Since 1990, Malta's unit labour costs have increased by an average of 0.14 per cent annually. This contrasts with developments in other advanced countries that managed to lower their unit labour costs by ensuring that compensation per employee was lower than productivity gains. Together with the harsh reality of cheap labour countries, this is a prescription for an accelerated loss of competitiveness, lower Foreign Direct Investment (FDI), and thus lower GDP.

In this scenario, the Federation would have expected Government to undertake a restraint on wage increases. In contrast, Government chose to set a dangerous precedent and give an extra 50 cents increase in the weekly statutory wage over and above that 'allowed' by the COLA mechanism. This does not respect the principle that increases in wages never exceed increases in productivity.

This dangerous formula, in tandem with the increase in utility bills, will prove unsustainable for local industry. Indeed, it is a double blow for local employers and is also insensitive to the reality of Malta's enterprise demography.

The latter is marked by a large number of small and medium-sized enterprises (SMEs), most of which will not benefit from the upward revision in the capping. These enterprises will have to absorb all the 55 per cent increase in their utility bills; moreover, most SMEs will have to carry the burden of a further 1.21 per cent monthly increase in their 2006 utility bills.

Following these developments, the Federation of Industry has received numerous distress calls from members. It is evident that these measures, in their complexity, are going to hit hard on manufacturing operators some of which have already indicated drastic measures. Other business operators in other sectors have aired similar complaints.

While understanding the reality of escalating fuel prices on the international market, the Federation warns that the measures as presented by Government are going to endanger the future of enterprise growth. In this respect, we strongly appeal to Government to reconsider the capping instrument.

The FOI believes that addressing these difficulties and implementing the 2006 Budget proposals are key for Malta's economic performance next year and in the years to follow.

There are also some limitations in the 2006 Budget that the Federation finds it necessary to highlight:

The 2006 Budget emphasises on further fiscal consolidation in favour of economic growth. In addition, measures to reach the Maastricht Criteria and adopting the euro are overshadowing the importance of reaching the other Lisbon targets;

Good instruments to increase innovation and research and development, such as the Technology Venture Fund, are nowhere to be seen in the Budget speech in spite of having been announced in previous budgets.

The Budget speech document has ignored the importance of allocating funds for the building of new factories and the restructuring of existing ones. It signals that Government is surprisingly insensitive to the fact that the Lm40 million allocation to Malta Industrial Parks (MIP) for these purposes has not been affected.