MLP’s bleak forecast

In a recently published document, the Labour Party has undertaken to analyse the state of the Maltese economy. The report, presented in the form of a 60-page booklet also outlines the short-term prospects for the economy.

When launching the report, Labour spokesperson Leo Brincat said that the analysis was not performed solely on government released statistics. He insisted that "time and time again the local statistical agency has failed to pinpoint growing structural problems faced by our country." In this respect the MLP’s report examines the official statistics and ensures that they are internally consistent and looks to corroborate the data from non-government controlled sources.

The report clearly states that the Maltese economy has been characterised by a growing structural deficit in public finances for at least the last decade. More worrying for the Labour Party is the fact that government’s growing dis-saving was not compensated for by a rise in private saving. This leads to the second major problem.

There is a persistent and growing deficit on the current account of the balance of payments.

The report also cites the lack of foreign direct investment, which is accompanied by a substantial outflow of portfolio investment due to exchange control liberalisation.

When analysing public finances the report chides the Nationalist government for not enacting a strategy to rationalise the civil service and increase efficiency. The report says that the ‘Nationalists have decided to tackle the deficit problem by raising taxes or introducing new ones.’ The study concludes that in 2001 every Maltese citizen, including children and pensioners, will end up paying an additional extra Lm450 in taxes, compared to 1998.

The share of taxes in Malta’s GDP has risen from 32% to over 36% during the first three years of the current administration. The MLP says that this has affected business activity negatively giving rise to an acute liquidity problem.

The report goes on to say that ‘while households and businesses are being told to make sacrifices, Government is continuing to indulge in its previous over-spending.’ Figures quoted show that the projected government spending for this year will be at least Lm89.4 million higher than it was in 1998. The report states that an increase in public sector employment indicates that ‘the state is actually managing to do less with more.’

In its break down of the various economic sectors the report outlines the danger facing the manufacturing sector which is increasingly becoming dependent on ST Microelectronics.

Manufacturing remains one of the most important pillars of Maltese economy, particularly because it provides employment to around a third of private sector workforce.

ST, which is a foreign-owned firm, generated 99.2% of the increase in the turnover of the manufacturing industry during 2000. In contrast, the remaining enterprises, which employ 85% of the full-time industrial workforce, saw their sales rise by a mere Lm2.1 million or 0.5%.

Excluding ST from official statistics shows overall stagnation in turnover, employment and investment in the remaining manufacturing industry during 2000.
The Labour Party is suggesting government act as a catalyst by putting in place an industrial policy that is not a replica of EU regulations. The report encourages government to tackle important issues, such as the lack of technical skills, problems in the transport sector and growing concerns regarding bureaucratic inefficiency and misguided government policy.

The report states that the overall indications that are emerging for 2001 are that the economy is likely to slow down further. Investments undertaken by ST and Go Mobile last year would not be repeated this year thus reducing the contribution of investment to economic growth. Furthermore, tourism is not forecasted to make any significant inroads in 2001. The export-oriented firms are expected to find the road ahead rather difficult as global economic growth, particularly in the United States and Europe, Malta’s main destinations for exports, is expected to slow down sharply.

The construction industry is the only sector, which is most likely to stage a recovery. Nonetheless, the report indicates two problems that may hinder the recovery: lack of skilled workers that could induce firms to import labour, and further delays in government projects.

The report concludes by saying that the economic problems the country is facing are mainly the product of economic policy decisions taken over the past decade. The Labour Party insists that fiscal policies were excessively expansionary because of unbridled growth in expenditure and employment. Furthermore, the lack of supervisory control by the authorities gave rise to lax banking practices in the provision of credit.

In this respect, signs of credit crunch are now exposing the weaknesses of several business firms arising from investment decisions based on distorted signals from past economic policy choices.