On Monday, Finance Minister Clyde Caruana will be delivering his budget speech against an extraordinary backdrop. Rising climate change concerns, the Russian invasion of Ukraine, the energy crisis, some remaining post-pandemic economic pickup disruptions and considerations on our macroeconomic and fiscal landscape will, to some extent or other, all have a bearing on the forthcoming budget.
Caruana will clearly need to shape budgetary policy in a way that fosters financial sustainability, more so because, even if suspended until the end of 2023, he will certainly be aware of the need to stay on target to meet core EU fiscal rules. This, within a scenario where we are experiencing an increase in the cost of borrowing and, hence, greater debt servicing costs.
He will also need to measure up on the budget cuts following his declared intentions of introducing some government cost-cutting measures intended to reduce the public deficit.
Nonetheless, the finance minister is expected to maintain the stance of no increases in taxation. This, on the premise that our public debt-to-GDP ratio can be adequately serviced through the country’s continued economic growth. On the flip side, one can also anticipate that he will take the opportunity to underline the need to address tax evasion, along with promoting fiscal morality.
The upcoming budget will, of course, cover various important issues impacting the economy. It will need to balance measures aimed at alleviating inflation and the cost of living difficulties. This will be addressed by means of the statutory wage increase according to the cost of living adjustment (COLA) mechanism, even if we will need to look way beyond this increase.
Despite high employment levels remaining relatively stable, continued inflationary pressure has somewhat blurred business expectations, particularly due to concerns on significant wage growth. It is therefore important that such wage growth does actually dampen inflation and not further fuel it, otherwise, we may enter into a wage-price spiral, apart from the risk of starting to cut into our competitiveness.
Beyond budget expectations, the finance minister, during the recent launch of a labour force skills survey by the NSO, called for a strategic change in how we should be fuelling our economic growth. He went on to elaborate that a new economic model was required and that this survey would provide the data on which government economic policy for the next 10 years will be based.
Continued inflationary pressure has somewhat blurred business expectations- Norman Aquilina
He argued that such an economic model and arising policy would encompass and address a broader spectrum of considerations which would not just be a question of generating more wealth but also of having a better quality of life.
It is positive that the government is now set on rethinking its economic strategy, as it simultaneously continues to resort to temporary anti-inflationary energy cost subsidies, knowing only too well that in the longer term it is the implementation of the right economic policy, and not unsustainable subsidies, that will ultimately generate that lasting economic growth along with improvements in our social well-being.
It is pertinent to highlight that the strategic direction indicated during last year’s budget speech was meant to have served as the first step towards transitioning away from a construction-centric economic model. Unfortunately, to date, the situation remains largely unchanged.
We have heard repeated pronouncements on the need to change the economic recipe from one based on importation of labour to a new employment policy with emphasis on quality of jobs. This is the right strategic direction to pursue, as it is only too evident that the rapid growth in population, and subsequent development over these years, came with social, environmental and infrastructural consequences.
The emphasis needs to be more and more on improving the level of productivity as opposed to the size of our workforce. This, also implying the need to right-size public sector employment. We need to strengthen our competitiveness by means of investing further in our skills and capabilities.
Achieving a sustainable and successful economic model needs to be built more on brains and less on cranes.
However, to effectively redirect our focus and address these strategic changes requires a different political mindset. We need a new thinking among our policymakers which puts under check any further political interference which has propagated over the years. The case of Air Malta has made it amply clear to all that commercial strategies and political expediency simply do not mix.
It is encouraging to note that the finance minister seems set on the right track, having been sending the right messages, at least in terms of strategic direction. The key question that remains is how is he going to ensure we truly move in the right direction, introduce and implement the right policies and, most importantly, deliver the desired results.
He will need to reason and act equally like a strategist and tactician by presenting a vision which moves away from overly focusing on short-term gain, as the current economic and social landscape amply demonstrates, to looking beyond, set towards building a more resilient and sustainable future.
He will also need to articulate a budget which projects and inspires action targeted towards consolidating our competitiveness, ensuring we maintain our public finances in order, improve our environmental track record and maintain our social advancement.
Norman Aquilina is Group Chief Executive of Simonds Farsons Cisk Ltd.