Last Updated on Thursday, 5 September, 2024 at 8:57 am by Andre Camilleri
Silvan Mifsud & Kurt Muscat
Over the past decade, Malta has experienced remarkable economic growth, transforming itself into a vibrant hub of prosperity within the European Union. This unprecedented expansion, while impressive, has not been without its challenges. As the nation now faces mounting infrastructural strains and fiscal pressures, the government finds itself at a critical juncture, needing to reassess and redefine its economic strategy to ensure sustainable future growth.
Between 2013 and 2019, Malta’s economy witnessed a robust and sustained upswing. The country’s Gross Domestic Product (GDP) grew at a rate that outperformed many of its European counterparts. In 2019 alone, Malta’s real GDP growth rate stood at 6.85%, significantly higher than the EU average of 1.8%. Unemployment rates plummeted to historic lows, reaching 3.6% in 2019, showcasing a thriving job market and a strong demand for labour across various sectors. This economic growth trajectory was largely driven by sectors such as financial services (CAGR +6.3%), wholesale, retail, transport accommodation and food service activity (CAGR +7%) information technology (CAGR +20.4%) and professional scientific and technical ( CAGR +16.6%). The Construction sector grew by a CAGR of 7.7%, however when looking at it within the context of the entire economy in real terms, it only contributed to 4% of GVA growth between 2013 to 2019. Interestingly, except for the free childcare scheme that enabled more women to join the work force, much of this economic boom occurred with minimal increased fiscal expense from the government.
However, an economy can be directed and stimulated more than just at increase in fiscal expense or reduction in taxes. During this period, we have seen various policy decisions that were the basis of the short-term gains that helped Malta’s economy to grow at such a fast pace. Among such policy decisions one can mention the passport scheme and the planning policy decision that allowed five floors to be built instead of three floors. This meant that Malta had a balanced fiscal budget until 2019, which then went haywire from 2020 with the advent of the pandemic and with various direct government fiscal interventions (subsidies), which are still in place until today.
The above-mentioned policy decisions together with a laissez-fare approach, from 2013 to 2019, meant that various human resources were directed at economic sectors which did not necessarily result in the highest productive output. The laissez-faire approach was most evident in the large number of low-paid jobs generated by the economy, which were primarily filled by the influx of foreign workers.
While this strategy addressed immediate labour shortages, it also highlighted the government’s short-sightedness in not concurrently investing in productivity improvements. Reliance on increasing the labour force without enhancing efficiency led to diminishing returns and exposed the economy to vulnerabilities, especially in the face of external shocks and changing global dynamics. This strategy also meant that certain critical aspects, such as productivity enhancements and infrastructural development, did not receive adequate attention. The focus remained on quick gains and quantitative growth rather than qualitative improvements, leading to systemic vulnerabilities becoming increasingly apparent as the economy expanded. Ultimately this meant that by 2023, foreign nationals constituted approximately 30% of the total workforce, a substantial increase from previous years.
This swelling population has exerted considerable pressure on Malta’s infrastructure. The island has grappled with frequent power cuts, with energy grids struggling to meet the heightened demand. Road congestion has become a daily ordeal, with traffic extending through most parts of the day, leading to lost productivity and increased environmental pollution. Moreover, inadequate waste management and overburdened sewage systems have led to pollution in the surrounding seas, tarnishing Malta’s image as a pristine tourist destination. The degradation of natural resources and public amenities poses a significant threat to the tourism sector, which is a vital pillar of the nation’s economy.
Amid these infrastructural strains, Malta now faces escalating fiscal challenges. After a sustained period with a balanced budget, during and following the pandemic the government’s deficit has surged, crossing the thresholds deemed acceptable by the European Union. The EU Commission has called upon Malta to reduce its deficit, insisting on bringing the deficit-to-GDP ratio below the stipulated 3% mark. In recent years, Malta managed to somehow prevent from having this ratio spiral out of control, albeit being above the 3% mark, by boosting GDP through continued economic growth. However, with the current infrastructural limitations, this approach is no longer viable. In response to the fiscal pressures, implementing austerity measures emerges as a seemingly logical solution. However, history has shown, particularly during periods of slowdown, that austerity during economic downturns can be counterproductive, stifling growth and exacerbating social inequalities. This means that ideally, a greater sense of control and reigning in should have been exercised during periods of prosperity, to build fiscal buffers, not when the economy is vulnerable. Contrary to this, during the past years, the government employed more people than actually needed within its structures, robbing the labour forces from valuable resources that were needed during an unprecedented period of labour tightness. This has not only contributed to the deficit we are seeing currently but also slowed the economic transition towards higher productivity as it took away the incentive for individuals to upskill and perform better.
Malta now finds itself between a rock and a hard place, grappling with a higher-than-target deficit while its infrastructure desperately needs investment. Compounding these challenges is the forecasted slowdown in economic growth, which, combined with the government’s limited ability to implement more accommodative policies due to the laissez-faire approach taken during years of prosperity, leaves fewer options for manoeuvring out of this predicament. Hence the policy decisions during 2013 to 2019, which had short-term boosts are actually the foundational cause for the difficult challenges we are facing now.
To navigate this complex scenario, Malta must undertake bold and strategic reforms aimed at overhauling its economic growth model. Investing in infrastructure is not just necessary but urgent. Upgrading energy grids, expanding and improving transportation networks, and enhancing waste management systems will address immediate strains while laying the foundation for sustainable growth. All of such investments will address the supply side. We also need the courage and proper leadership to implement measure that will mould behaviours that will affect the demand side of things. At the same time, focusing on productivity enhancements through technology adoption, education and skill development is crucial to ensuring that future economic expansion is both efficient and resilient. Furthermore, diversifying the economy and promoting sectors that are less labour-intensive yet high in value addition can reduce dependency on foreign labour, thereby mitigating related challenges. Finally, prioritising environmental sustainability will help ensure that economic activities do not compromise the natural beauty and ecological balance that are integral to Malta’s identity and attractiveness. Only through such comprehensive and forward-thinking measures can Malta hope to secure a stable and prosperous future in the face of its current challenges.
Silvan Mifsud is director at EMCS Advisory and also a council member of The Malta Chamber
Kurt Muscat is an assistant manager at EMCS. He is a qualified accountant with a Masters in Economics
