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Matthew Vella
Financing the state’s healthcare, and cutting down on university stipends – the seedlings of resource misallocation which Central Bank governor Michael Bonello laments as Malta’s predicament.
Addressing the Institute of Financial Services last week, Bonello said Malta’s goal had to be to increase productivity from its measly projection of just 1% to 2% in the next two years.
He listed a low labour participation rate – at 58% well below the EU average of 70% – and more working days lost to holidays, three fewer than the EU average, as obstacles to greater productivity.
But Bonello turned to the “legacy of welfare schemes and public services” bequeathed by post-independence governments which “not only distorted incentives and encouraged waste and abuse, but are also largely unsustainable.”
“One can get expensive medicines or have a heart by-pass for free, regardless of one’s capacity to pay… the sustainability of the public health system is imperilled by the manner in which it is financed,” he said of the service whose medicines and surgical materials will cost 13% more next year, Lm21.5 million. “Sooner or later, the ability to provide free services to those who truly deserve them will itself come under threat.”
He reserved similar treatment for Malta’s unique funding system for higher education students, who will receive Lm8 million this year in maintenance grants. “Funds that would permit these institutions to offer better quality programmes… are instead paid to students regardless of their financial means.”
Bonello’s words echoed those of many leading economists who have constantly called for cuts in recurrent expenditure which in the recent years has crowded out investment spending. Indeed, he mentions in his opening words that political discourse was still hampered by frequent tax reductions and subsidies, “when it should be rallying popular support for the need to strengthen the country’s capacity to generate wealth on a sustainable basis.” Only lower spending, he continues, can make further cuts possible that would stimulate private investment.
“Malta must acknowledge global realities,” he said about looking for direction in the high-tech manufacturing industry and knowledge-intensive services, trumpeting government’s mission on improving the island’s ICT potential.
“But where is the money to be found… when almost 80% of recurrent government expenditure goes on transfer payments and wages?” he adds, claiming EU funds alone are not sufficient, with compensation of public sector employees having been stable at 36% of recurrent expenditure, peaking at just over 15% of GDP in 2004 and projected to decline to 13% in 2008 – signs of the future decline in the workforce.
Referring to transfer payments, Bonello attacked the “blanket approach” to welfare, higher education and health. He asked whether it was “promoting a culture of reliance on the state rather than the encouragement of private initiative. Our system does not focus exclusively on those who are truly in need, but also provides a cushion for higher income earners, at the cost, however, of a heavier fiscal burden.”
To this he added the need for a sustainable social programme, calling for a reduction in non-essential transfer payments, introducing means-testing, combating tax evasion, and tightening the criteria for granting benefits: “The underlying objective should be to promote a culture of self-help and efficiency.”
He also said that in the field of higher education, “a strong case can be made for at least the partial replacement of grants” – loans for students from better-off backgrounds, with a repayment schedule that is staggered out if the student goes on to post-graduate study. The money that is saved has to be turned into quality education.
Drawing an example from Singapore, Bonello mentioned that students finance their education by borrowing from a central fund made up of social savings funded from employers and employees, funnelled off into three accounts – two of them, he said, fund the family’s educational expenses or the purchase of a house. The other can be used for medical expenses. “Under this scheme, the patient pays a deductible amount and is required to make a co-payment. The system encourages efficiency, because medical practitioners and hospitals must compete for patients.”
Bonello appealed for imagination in reform, pointing at restrictive practices at the harbours, which raise costs by pushing up import prices and lower Malta’s competitiveness by increasing the cost of exports.
“It is rather ironic that decades after the abolition of hereditary titles, and at a time when the merits of free markets and competition are widely acknowledged, Malta sanctions the inheritance of licences and protects monopolies not only in the harbour, but throughout the public transport system… if investment is to be channelled to productive activities that generate the highest return, profit signals should not be distorted by monopolistic market structures, subsidies or protection.”
Bonello warned that Malta’s eligibility for EU funds will decline after 2013, with the burden of the ageing population both in terms of health and pension expenditures becoming heavier that it is today. “It will be imperative to have invested massively and wisely in the meantime such that the economy will be generating sufficient wealth and, therefore, tax revenues to bridge any budgetary shortfall.”
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