Time to stop and think

The Minister of Finance recently gave us all a warning. As an economist trying to grapple with the sad scenario of local politics, he left a lot unsaid. But he did let slip that ‘certain’ sectors of our economy were overheating and that economic booms ‘harbour the seeds of their own destruction’.

Sober words and not a moment too late.

Many presume the he was referring to our overheating construction industry and the ever increasing lists of proposals for mega-construction projects, scandalous or not, in the media. The list seems endless. The last time I counted it was about eight with probably a few more still under wraps.

No doubt all these projects are the result of a very liquid and booming economy for which Joseph Muscat tries to take all the credit. Though the restructuring of the energy sector and the family friendly measures sending our underemployed housewives back to the labour force were exactly what the country needed, a large part of the credit has to go to the PN for forcing EU membership down the throat of the Labour Party and for subsequently adopting the euro.

The roots of this apparently miraculous performance of our economy lie with the restructuring that had to be done to join Europe, particularly to the radical reorganization of our fiscal system with the introduction of VAT, set out as a pre-condition by the EU to test our ability to adopt and our determination to join. This was so painful that it cost two elections. One lost by Eddie Fenech Adami in 1996 for introducing VAT and another lost by Alfred Sant two years later after he tried to replace it with a bag of smoke.

All this was not a moment too soon. The euro saved us when the world money markets went berserk. The Maltese economy sailed safely through the worse economic crisis since the 1920s and took off like a rocket when the European economies slowly recovered. Moreover, the massive drop in the price of our oil bill made it possible to divert consumer consumption away from procuring energy to other areas.

The latest statistics sound like a fairy tale. Unemployment below 3,000 in an island that traditionally had to export labour to survive and this with a labour supply that rose from 169,000 in 2008 to 196,000 in 2015. Since 2008, government revenue rose by a third to €3,327 million. With a growth rate of more that 5%, Malta’s economy is the best performer in Europe, the government deficit is crumbling and will disappear in two years when the GDP/national debt ratio is expected to fall to 60%.

Malta has suddenly become the darling of rating agencies and a rare, successful example of what can happen to an economy that successfully adapts to the EU and does not squander EU funds.

There has been a price to this breath-taking pace of change. Some social sectors just cannot keep up. They have to compete with the eastern Europeans now flooding to partake in this bonanza for the €5-an-hour jobs. Every second job is going to a non-Maltese with the resulting social integration problems. 

Traditionally in Malta, excess liquidity is channelled into construction. The current boom has been fuelled even further by interest rates at a historic low. Housing prices have risen beyond the reach of lower income citizens, particularly in Sliema, St Julian’s and Swieqi. Gzira and Msida are quickly joining the fray. Most significant of all is a rapidly rising population, to a large extent due to younger and foreign immigration. This is now 425,000, and we have reached a population density of 1,346 per one sq km. – excluding tourists. A massive challenge to our environment is in the making. I will not mention traffic and foreign ghettos in Bugibba. Suffice to say that the population in other Mediterranean islands never exceeds 400 persons per sq km.

In the circumstances, we will do well to heed the warning of our Finance Minister to, at least, stop to think for a while. Should we not pause to give ourselves time to digest what we have already on the plate? Should we create more jobs when every second job has to go to a non-Maltese seeking somewhere to live? 

And how are we to choose which mega-projects should go ahead? The list is so large that even if half fail on their own merits, it will still be too much to digest in the next three years. Is this what we want? And if so, is this what the country needs?

We have been here before. Let us learn from the mistakes of our last construction boom when then Minister for Finance John Dalli proclaimed an amnesty for undeclared money abroad and within a few years Malta ended up swamped with money looking for investment... in the property market. Where else? Malta took many years to recover when it was all over. 

Environmentalists blame developers for all this. This is plain nonsense. It is just like blaming car importers for our traffic problems. Developers build to meet demand. And when they get it wrong, they go bust and nobody bails them out. The responsibility for aggregate demand for our construction industry rests fully, like with all other industries, with the regulatory function of the state.

The current situation is a golden opportunity for government to regulate demand for the property market by fine-tuning the supply of public land for development purposes. One cannot but point out that many of the proposed mega-projects are going to be built on public land transferred at preferential rates. For starters, government should stop gifting out public land to developers. Current commercial rates should apply. This should tone down demand for the less value added projects that lack originality and are just sheer speculation. It should also review the beneficial tax status for special areas. Commercial projects should not only pay their tax due but should also be expected to partly subsidize social housing and the infrastructure. 

Malta may be going through an economic boom but this does not necessarily mean that the decisions that need to be made are any easier. 

Toning down the upturn when it is getting out of hand will make booms last longer and ensure that they do not inflate into fickle bubbles.

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