Budgetary matters

Whilst the government announces various policies, schemes, and strategies during the year, the budget is still seen as a central economic policy document which lays out the action points and work programme for the following fiscal year.

It remains a key economic document which outlines the way resources are being allocated especially if they are aimed at the short-term or more focused on addressing structural challenges or preparing for long-run goals.

The annual budget is not just an accounting exercise whereby government projects its revenues and expenditures. It is an economic policy tool that allows governments to allocate resources within a financial constraint. It allows the government to correct market failures and more importantly to direct present resources to future growth.  

In an economy, government seeks to fulfil five main roles through its resources, these being: 

    • A stabilisation role – government intervenes to ensure that the economy continues performing and generating wealth and in a time of economic crisis, like the present energy hike situation, government intervenes to reduce this impact; 

    • An allocative role – this is the way government allocates and gives signals on where and how to allocate resources; 

    • A distributive role – governments exist to correct market failures to ensure that the vulnerable in the society are supported; 

    • A regulatory role – this is the legal arm of government, and which focuses on creating the right conditions for business to thrive and for creating a society that is governed by the rule of law; 

    • An administrative role – governments also play key administrative roles and this is primarily done through the civil and wider public service.

From the various media interventions that have been made, we can already get a feel that government will be focusing very much on the stabilising and distributive roles. Through the maintenance of the energy subsidies, COLA, and the expected increase in minimum wage, one can clearly see that government is focusing on these two roles.

We believe that Malta faces a productivity challenge and needs to leverage its allocative, regulatory, and administrative roles collectively to address this. Productivity is considered a key source of economic growth and competitiveness and, as such, is basic statistical information for many international comparisons and country performance assessments. Nobel laurate Paul Krugman states that “productivity isn’t everything, but in the long run it is almost everything.”

Despite Malta’s strong and resilient economic performance over the past few years, its productivity performance unmasks several structural economic challenges the country and specifically non-service-based sectors are facing. Malta has successfully steered its economy towards service-based sectors. This has led to the formation of two main clusters.

The first cluster, represented by the gambling, information & communication, and other service-based sectors, presents higher-than-average productivity which generated a high-level of value-added with a leaner workforce. In contrast, the second cluster of more labour-intensive sectors has failed to generate high levels of productivity. Various other economic challenges exist that are structural in nature including unfavourable demographics, low educational outcomes, and fragmented ecosystems. Increasing productivity is the only way to maintain income growth and access to essential goods and services.

We therefore would like to see a bigger focus on productivity enhancing measures. On its allocative role we would like to see business support measures and incentive grants given based on productivity enhancing investments. In this vein, we would like to see investments in the digital and green transition as well as in the enabling environment including infrastructure.

Over the past few years, a lot of investment has gone into the hard infrastructure, primarily roads. Government has also announced investment in industrial infrastructure through the upgrading of various industrial zones. However, Malta requires investment across a broad spectrum of infrastructure including the energy, sewage, transportation and the educational system.

Innovation is going to be critical for Malta’s economy to remain competitive and attractive in the future. Malta needs to further strengthen its innovation ecosystem at all levels especially business investment in research and development. Given the risk involved, there currently exists a market failure in the financial and banking system in their ability to finance such investments. The Malta Development Bank needs to play a key role in making available ‘patient finance’ to support research and innovation projects. Increasing skills will also be imperative and we would like to see a greater push towards the implementation of the National Employment Policy.

From a regulatory and administrative role, government has already launched several reforms however it is time to delve deeper into institutional weaknesses, resources, and transformation. A governance transformation reform process should be started to ensure that institutions are truly digitally transformed and able to leverage the full benefits of technology to become digital to the core.

This will bring about several benefits to society at large, especially businesses that deal so often with institutions and regulators.

In addition, we would like to see more regulatory and jurisdictional innovation being exercised with the establishment of new niche economic areas or the further diversification of sectors already well-established on the island.

We also strongly believe that the budgetary process needs to embrace more fully the concept of impact assessments and performance-budgeting. Performance-Based Budgeting aims to achieve more effective and efficient implementation of public functions, higher quality of public services, reduction of general government expenditure and staff costs, and more flexible and less bureaucratic management of the government sector.

As a small and open island, the economy will continue facing key challenges over time and needs to build its own resilience to inherent vulnerabilities that can be exacerbated by external occurrences.

The 2008 financial crisis and the COVID pandemic should remain as stark reminders. It is therefore even more critical for our country to pursue and engage in economic debate that is evidence-based and beneficial to the country in the long-term. 

Social partners have a key role in this together with political parties.

Above all, we do hope that the budgetary debate in the coming weeks should be more about substance and less about politics.

Budget 2024: MaltaToday special coverage

MaltaToday will offer ongoing coverage of the budget throughout the day on Monday, providing a snapshot of proposals made by the social partners.

In the evening, we will be providing extensive coverage of Finance Minister Clyde Caruana’s speech.

Dr Stephanie Fabri and JP Fabri will be our resident economists, giving insightful instant reactions to the measures announced by the Finance Minister.

Follow Budget 2024 as it happens on MaltaToday.