Central Bank Governor warns over sustainability of €191m pensions’ contribution top-up

Former minister for economic affairs Josef Bonnici has warned government over the sustainability of a major measure in Budget 2012, by which €191 million are expected to be paid out as a pensions contribution 'top-up'.

The warning was sounded in Josef Bonnici's first formal speech as Governor of the Central Bank, who said that the gap between pension contributions and benefits is of concern.

Addressing the Institute of Financial Services, Bonnici explained that the financial estimates for 2012 include an amount paid by government to top-up the contributions of employers and employees in the private sector.

"While such an arrangement was understandable in the early phase of Malta's economic development, it is less justified today," Bonnici said.

He explained that €145 million are earmarked for 2012 for this "so called" direct contribution by government by way of grant to the private sector in terms of the Social Security Act of 1987, but the "total top-up for both public and private sector employees comes to just €191 million".

The governor said that this amount is in addition to the national insurance contribution by the government in its capacity as an employer.

"To put these numbers into perspective, one must keep in mind that the deficit in the consolidated fund for the same year is projected at roughly €145 million," Bonnici said, adding that the size of these outlays "should be of concern for two reasons."

The shortfall - Bonnici said - is certainly not arising from pension benefits that are too generous.

Secondly, the amount of the welfare gap as identified in the estimates is going to rise rapidly as people live longer and the population ages.

The governor said that one suggestion for alternative financing would involve a multi-year programme that would reduce government's matching contribution gradually over an extended period of time, ideally through a tripartite consensus at the MCESD.

According to Bonnici, during times of economic growth, when the growth rate exceeds a particular threshold, the revenue from a marginal increase in income tax or national insurance rates would be earmarked to reduce the subvention. The increase in rates would be automatically suspended during times of slower growth.

Bonnici called on government to establish spending rules which would give credibility to any intent to curb the deficit.

The former Cabinet minister admitted however, that setting such rules would involve the "difficult task of setting priorities", but insisted that the necessity to cut expenditure in one place to increase spending in another was "an essential feature of budgetary management" while stressing that Budgetary rules such as expenditure limits have experienced a surge in popularity in the wake of the global financial crisis as governments have had to come to terms with the implications of high deficit and debt levels.

On competitiveness, the Central Bank Governor warned that government must pay attention to inflationary patterns, which has averaged around 2.5% since 2004, when compared to the EU average of 2.1%.

"Although imported inflation is inevitable, we have to be particularly mindful of locally-generated price pressures or inflexibilities in structures," Bonnici warned.

He stressed that Malta's competitiveness would fair better if cost of living adjustments were incorporated into collective agreements and, therefore, related to productivity improvements rather than imposed by legislation.

Another warning was delivered to local banking institutions that the Central Bank would play no part in providing large-scale liquidity for banks' loans and investment activities.

"The Central Bank expects such institutions to look primarily to the markets for their funding requirements," he said.