Michael Bonello’s simple medication for the economy: cut public spending

Michael C. Bonello has once again warned against political expedience overriding Malta’s economic interests in a hard-hitting address to the Institute of Financial Services, in what has become a keynote speech for his insightful and sober appraisal of the Maltese economy.

Bonello reiterated common themes about Malta’s structural weaknesses, calling for a reform in university stipends, health spending, welfare payments, the COLA, and for a cut in public spending.

“What I am advocating is not austerity but enlightened self-interest. It is a commonsense appeal for a closer alignment of our priorities with the economy’s strategic objectives and for a more efficient allocation of resources,” Bonello said.

The governor warned that Malta’s short recession had seen the economy rebound from a contraction to 2.1% of GDP in 2009, to a growth to 4%. But he warned against “manifestations of the ‘Malta is different’ syndrome” and “suggestions that belt-tightening and structural reforms are for others, but not for us.”

“For a country that, with one exception, has not had a current account surplus or a balanced budget for at least fifteen years, this attitude betrays a poor understanding of the growth dynamics in a small, open economy and of current world realities,” Bonello charged.

Bonello said that Maltese wages were still rising faster that its productivity, partly leading to weak profitability, which in turn reduced the incentive to invest despite low interest rates.

He also called for a reform of the Cost Of Living Adjustment (COLA), which adjusts wages to inflation levels. “[It] represents a permanent drag on Malta’s competitive position,” he charged, while lamenting the low level of labour participation. “In 2009 the employment rate stood at 55%, compared with a euro area average of nearly 65%. The activity rate among women and older workers in particular is especially low.”

But he also warned against the cutting of taxes, or increasing them. “Higher indirect taxation tends to push up the price level and, hence, harms competitiveness… An option which is at once fiscally beneficial and socially desirable is to close remaining tax loopholes and engage in a more aggressive pursuit of tax evasion and benefit fraud.”

“The only real alternative, however, is to cut public spending,” he declared, illustrating his point with the figures that colour Malta’s economic health: €2.5 billion of public spending in 2009, almost 44% of GDP; public salaries at 14.5% of GDP, followed by pensions (13%), healthcare (2%), altogether making up 65% of the entire GDP.

“Progress has already been made by reducing subsidies, through the privatisation of the shipyard,” Bonello said, but added that few specific cuts are identified for 2011, and that the latest annual report by the National Audit Office shows “ample scope for controlling expenditures more effectively and for improving revenue collection.”

He said that while Malta could afford to take less drastic measures than those countries that have had to make deep cuts, people still expected the state “to hand out money it does not have”, in a reference to Malta’s widening welfare gap.

“Politicians, trade unions, NGOs and other opinion shapers must explain that we do not have money for everything and that you cannot have gain without pain,” he said before turning to the universal dispensing of free goods and services as “a wasteful and unaffordable principle”.