Moving from domestic demand to an export oriented framework

Finance Minister Clyde Caruana took the main stage in parliament last month, red briefcase in hand, and presented Budget 2025. His style of budget emphasizes stimulating and sustaining internal consumption and investment. The government goes again to prioritize spending on social services, infrastructure, and programs that directly benefit the domestic population. The continuation of enhanced social measures, the reduction of the country’s deficit, the drive towards fiscal compliance and the expansion of tax bands are certainly all positive and noble measures. 

The government wants to remain relevant in attracting foreign direct investment. This is not a given since the blanket introduction of a minimum 15% Pillar 11 tax places us at a disadvantage when compared with easier terms offered so far. The negotiation of a 5 year derogation until starting invoking Pillar 11, was well received and officially we were informed that the tax rate can be sugar coated if negotiations succeed about the introduction of Qualifying Refundable Tax Credits (QRTCs).  

If and when successful, QRTCs will help us maintain a fiscal status quo. Yet, conscious of the format chosen to run government finances, for another fiscal year we are noticing a demand led budget. This emphasises economic growth driven by consumer spending, business investments, and government expenditures within the country.  Obviously, our main export revenue remains manufacturing, financial services and tourism. 

Revenue comes from taxes on consumption, income, and property, reflecting the health of domestic economic activity. The government does rely on VAT, capital gain taxes, and personal income taxes. As a result, it has vastly improved social welfare programs, pensions, health care funded by these revenues to support domestic consumption. Naturally for many budgets, governments promised a diversified economy. One lauds the 2025 budget structure which tries to ensure stable inflation, fiscal discipline, and a sound monetary policy to create a conducive environment for investment and growth. In passing, we cannot omit to comment on an important futuristic roadmap written by Draghi (a previous Italian prime minister and head of ECB).  

He argues that EU investment needs to grow by €750-800 billion annually to match USA and foster innovation. There should be more regular issuing of safe assets, such as EU bonds for joint-investment projects. State aid must be increasingly linked to Important Projects of Common European Interests (IPCEIs). This foments and supports innovation. So how does our indigenous budget philosophy compare and contrast with this policy.  Our style is to lean on increasing domestic expenditure via debt but not investing sufficiently on innovation and structured research.

Resting on a diversified economy, this encompasses multiple sectors (e.g., manufacturing, services, tourism, agriculture, financial services and maritime), leading to a broad range of job opportunities. This diversification has helped us to absorb a larger workforce and reduce unemployment rates, while importing thousands of low-skilled foreign workers. The Opposition, and constituted bodies comment that the budget has been well received by middle class workers as a result of widening of tax brackets but does not go the extra mile to change the status quo and introduce more export revenue under a projected scenario of a diversified export led economy.

It is true that the ministry responsible for the economy has promised to attract foreign consultants to write a roadmap with policies till 2050. Many hope this will change our ingrained style of running a demand led economy and introduce new export streams. As new sectors develop, such as renewable energy or A.I technology, international they create new jobs.  Many may not have existed previously, attracting local talent and providing fresh employment opportunities. 

These boost our per capital revenue which compares favourably with average EURO zone countries but we are still far behind the wealth enjoyed by Norway, Luxembourg and northern European countries. Certainly, for the past 60 years we grew a tourist industry which consists of a high quota of low-paying visitors.  The cost of servicing such visitors which on average spend a daily €132 per head is high. Try costing noise pollution, more cars, blackouts, more packed beaches leading towards lower air quality.  On the other hand, if the projected new economic policy of increasing innovation and high-tech industries promised by the minister for economy bears fruit, we can target higher quality tourists and lucrative hi-tech revenue streams and Renewables.

This futuristic export-oriented 2050 plan is expected to focus on promoting superior goods and services for international markets. Such a diversified economy is less susceptible to downturns in any single industry. If one sector faces challenges, others may continue to thrive, providing a buffer against widespread job losses and supported by an elevated educational format, workers will be re-skilled in modern technology, making them more adaptable to changing job markets and reducing the current policy to import third country nationals.

It will certainly upgrade the minimum wage and provide a better safety net for our ageing population and limping State pension structure.  Diverse sectors can encourage innovation and the emergence of startups, which can contribute significantly to job creation. In summary, a diversified economy can significantly enhance employment opportunities, stability, and quality of life for workers. Diversifying an economy to reduce reliance on domestic demand involves implementing strategies that promote a broader range of economic activities, enhance competitiveness, and tap into international markets such as Asia.  

By implementing these strategies, Malta can create a more resilient and diversified economy that reduces reliance on domestic demand and enhances its ability to compete in the global marketplace.  Perhaps with the election of Donald Trump in the US and his penchant for crypto world, we can revisit and polish our Blockchain unique legislation and VFA acts. Trump has pledged to make the United States the "bitcoin and cryptocurrency capital of the world", so MFSA can finetune our regulations on this expanding global regime. In our corner, the writing is on the wall to diversify quickly and cautiously to change to an export focused model and mitigate commercial risks from two wars currently ranging in the Ukraine and Middle East.