Malta

   

Economic Policies

#11
Key Findings
Showing significant gains in recent years, Malta scores well in international comparison (rank 11) with regard to economic policies. Its overall score in this area has improved by 1.1 point relative to 2014.

Growth rates have been exceptionally strong, and unemployment rates have fallen to low levels. Export growth and a contraction in investment and imports have led to a large current account surplus. While external demand is forecast to remain robust, private consumption will take over as a growth driver.

Policies have helped improve employment rates among women, but absolute levels remain low. The large informal economy shifts the tax burden to formal wage-earners, with tax-evasion controls ineffective. Corporate taxes remain high, but targeted tax incentives often reduce the load very substantially. New reductions are available for SMEs.

The budget balance has shifted from small deficits to small surpluses. Debt levels are moderately high. However, health care costs and state-owned-enterprises may pose risks to future deficit targets. The R&D sector is underdeveloped.

Economy

#6

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
8
Economic planning is at the forefront of Malta’s policymaking process and a clear-cut assignment of tasks to government institutions is its strength. Strong ties between public institutions, the economic planning ministry and social partners exist through the Malta Council for Economic and Social Development (MCESD). This system has provided the ideal foundation for strong economic performance. Indeed, provisional GDP estimates for the second quarter of 2017 indicate an 8.5% increase over the same period in 2016 and a 6.4% increase in real terms. Strong export growth particularly in services and a fall in imports related to a contraction in investment is pushing up the current account surplus, which is forecast to approach 10% of GDP in 2017. Real GDP growth is projected to slow somewhat in 2018 to 4.9%. Private consumption is expected to become the main driver of growth due to the increasing population and growing disposable income. Furthermore, Malta’s labor market remains resilient and currently has one of the lowest unemployment rates in the EU. Current industrial legislation provides protection against dismissals and allows for open bargaining between employers and their unions, but few co-determination structures. Unit labor costs have remained moderate, but are projected to rise faster than the euro zone average in 2018 and 2019.

The latest EU forecasts project that Malta’s robust economic performance will continue in 2017 and 2018, driven primarily by external demand. Investment levels remain above historical averages, while declining unemployment rates and increased disposable income have encouraged economic growth. Moody’s Investors Services also confirmed Malta’s A3 rating with a stable outlook in September 2017. However, the World Economic Forum’s Global Competitiveness Report 2017-2018 identified the inefficiency of government bureaucracy and the insufficient capacity to innovate as the most significant obstacles to doing business in Malta. Other limitations included suboptimal infrastructure, difficulties in accessing financing and an inadequately trained workforce. Nonetheless, the country ranked 22nd in terms of technological readiness and 37th overall, which represents an improvement over the preceding reporting period where Malta ranked 40th.

The World Bank’s Doing Business Report 2017 ranks Malta’s ease of doing business at 76th out of 190 countries, an improvement from the preceding year’s rank of 80th. This year’s report notes improvements in relation to business registration with the Inland Revenue Department and improved access to credit information through the launching of a new credit registry; Malta is, however, viewed unfavorably when it comes to increased costs associated with tax and social security contributions. In an effort to reduce red tape, government has created the position of Commissioner for Simplification and Reduction of Bureaucracy with the aim of, among others, reducing the administrative burden for investors setting up businesses in Malta. A total of 500 simplification measures have been implemented over a period of five years. The government has stated that it is working to make the islands a center of excellence for block chain technology, which it believes will be the leading engine for growth in the future.

Rapid economic growth has brought to the fore several challenges. First, the continued dependence on financial services and property development along with the widening trade deficit in 2017 highlight the need to further diversify the economy. Second, this growth has depended on massive building programs and the import of labor, while also increased demands on infrastructure and social services to a degree unsustainable for an island country that measures 316 square kilometers.

Citations:
National Statistics Office (NSO) News Release 141/2017
Times of Malta 05/08/2015 Malta with highest growth in GDP
Times of Malta 31/05/2017 Malta’s jobless rate remains among EU’s lowest
EU Commission Alert Mechanism Report 2016 COM (2015) 691 final p.33
Times of Malta 27/11/2015 EU Alerts Malta to ‘competitive erosion’
European Economic Forecast Spring 2017 p.96
https://www.moodys.com/credit-ratings/Malta-Government-of-credit-rating-6000129477
World Economic Forum Global Competitiveness Report 2017-2018 p. 196
Doing Business – Equal Opportunities for All (Economy Profile 2017 Malta) p.6
Doing Business – Equal Opportunities for All 2017 p. 7, p.179-180
https://simplification.gov.mt/en/Pages/home.aspx
The Malta Independent 05/04/2017 Government implements 500 simplification measures over a period of three years
Times of Malta 11/09/2017 Trade deficit widens by €100m in July
European Commission Autumn 2017 Economic Forecast - Malta

Labor Markets

#2

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
9
Unemployment rates are at historically low levels in Malta. Eurostat figures for August 2017 indicated that Malta had the third lowest unemployment rate in the EU and a below EU-average youth unemployment rate. Indeed, the national unemployment and youth unemployment rates stood at 4.2% and 11.9%, respectively, in comparison to the EU averages of 7.6% and 11.9%. The overall labor market participation rate was estimated at 68.7% during the first quarter of 2017 and represents the highest rate recorded among persons 25 to 54 years old. This is largely attributable to a broad range of measures undertaken by the government to reduce unemployment. These include a Strategy for Active Ageing, the Youth Employment Guarantee Scheme, extended training programs, a reduction in income tax, tapering of social benefits and an in-work benefit scheme. While Malta possesses a consolidated support system for the unemployed consisting of social benefits and retraining opportunities, schemes to help low-skilled individuals find employment are only now being introduced. Within this context, in 2016 the government signed an agreement with the General Workers Union to manage a scheme for the long-term unemployed on behalf of the national employment agency, Jobsplus. The 2015 budget included provisions for the enforcement of a positive quota in relation to the employment of persons with disabilities. As a result, the employment of persons with disabilities has more than tripled since 2014. Moreover, the recently set up Lino Spiteri Foundation is playing a significant role in integrating vulnerable individuals into gainful employment.

Various measures have also been introduced to increase female participation rates. These include the introduction of free child-care centers in 2014 and other fiscal incentives, including reforms to the maternity system, tax incentives, and wage subsidies for women over 40 entering the labor market. The 2016 budget also introduced a pilot scheme to subsidize care workers for the elderly and, thereby, reduce the burden on the careers of family members, a burden disproportionately felt by women. Collectively, these initiatives resulted in a 4.5 percentage point increase in the female participation rate during 2016. Nonetheless, Malta still has the widest labor market gender gap in the EU, which is directly related to the traditionally lower participation rate of women in the labor market.

The government must address several anomalies in the workforce: a female participation rate of 50%, shrinking workforce (by 2035 there will be 20,000 fewer workers), skills mismatch leading to a shortage of suitable labor, 16% of part-time workers wishing to upgrade to full time and a growing reliance on foreign labor. In 2016, 11,000 new jobs were created of which only 2,500 were filled by Maltese. Foreign workers were found to not be putting down roots on the island country; only 45% staying longer than two years – a constant hemorrhaging of the labor force. It is estimated that in 2018 2,000 jobs will remain unfilled; government is seeking to facilitate work permits for third country nationals. Employers continue to exploit gaps in the law, retaining workers on less than minimum wage. Unit labor costs have remained moderate, but are projected to rise faster than the euro zone average in 2018 and 2019.

Citations:
Eurostat News Release Euro Indicators 145/2017
Budget Speech (English) 2016 p. 21
Pre-Budget Document 2018 p. 13
National Statistics Office (NSO) News Release 103/2017
National Reform Program 2017 p.3
2017 Report on Equality between Women and Men in the EU p. 55
https://jobsplus.gov.mt/employers-mt-MT-en-GB/employing-persons/employing-persons-disability
Times of Malta 17/01/2017 Working disabled up, more than triple 2014
http://linospiterifoundation.org/our-vision/
Formosa Marvin (2014) Socioeconomic implications of population ageing in Malta: Risks and Opportunites
Economy will need 12,500 workers next year, Times of Malta 26/10/17
New deals to import non-EU foreign workers to Malta, Times of Malta 18/11/17

Taxes

#11

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
7
Malta’s income tax system ensures that a portion of income is non-taxable for all three tax categories (€9,100 for single individuals, €12,700 for married individuals and €10,500 for parents). Parents also receive a tax rebate on school fees, cultural activities, and creative education. No sales or inheritance tax is levied on a person’s primary residence. Moreover, first-time property buyers have been benefiting from a capped duty waiver since 2014, while similar benefits for second-time property buyers will be available beginning in 2018. Other measures that contribute to greater equity include the extension of the favorable 15% income tax rate enjoyed by pensioners working part-time in the private sector to pensioners working part-time in the public sector as well as the staggered removal of taxation for some working pensioners in the 2018 budget. In addition, there has been an annual increase in the income ceiling for those paying the 35% tax rate. An optional flat rate of 15% was also introduced for income from residential and commercial property rentals.

However, the burden of taxation falls mainly on people in fixed and registered employment. Malta’s informal economy is almost equivalent to 26% of GDP, estimated to have exceeded €280 million in 2016, though economists contend that the actual percentage is much higher. A 2016 ECB study shows that Malta has the highest number of cash transactions in the EU, in all likelihood resulting from rampant tax evasion. Tax evasion controls remain ineffective. A number of mitigating measures have recently been introduced to consolidate previously introduced actions in this area. Among others, these include possible measures to reduce the use of cash. A new joint task force that encompasses the Inland Revenue, VAT and Custom departments along with the Tax Compliance Unit has been established with the aim of ameliorating information sharing. In addition, property lease and renewal agreements are now subject to registration with the Inland Revenue Department.

With a corporate taxation rate of 35%, Malta has one of the highest tax rates applicable to companies in the EU. However, as a result of the full imputation system and the tax incentives provided to companies registered in Malta, the actual tax rate is estimated to be as low as 5%. Moreover, the Maltese tax policy does not include additional taxes on dividends paid to shareholders, apart from the fact that they are entitled to tax credits. Fiscal incentives enhance the competitiveness of various economic sectors and attract foreign direct investment. Special tax incentives are also available for industrial research and development projects, experimental development and the registration of intellectual property.

The 2018 budget, while not introducing any new direct or indirect taxes, introduces new tax reduction incentives for SMEs and schemes for Malta-based companies.

Citations:
https://ird.gov.mt/services/taxrates.aspx#2017
Budget Speech 2013 p. 14
Times of Malta 04/11/2013 Tax exemption for first-time property buyers announced
Malta Independent 10/10/2017 Budget 2018: Housing - Second time buyers’ scheme launched
Times of Malta 13/10/2015 Changes in income tax
Budget Speech 2018 (English) p.17, 20, 61
https://ird.gov.mt/faq/rentalfaq.aspx
Times of Malta 09/10/2017 No new taxes or tax increases in Budget 2018
European Semester Thematic Factsheet – Undeclared Work (Updated 2016) p. 3
Times of Malta 09/10/2017 Undeclared economy ‘much larger’ than €280m
Tax Reforms in EU Member States 2012 Report p.75
Commission Staff Working Document - Country Report Malta 2016 SWD (2016) 86 final p. 14, p. 15
Commission Staff Working Document - Country Report Malta 2017 SWD (2017) 83 final p.14
https://ec.europa.eu/taxation_customs/business/company-tax/anti-tax-avoidance- package_en
https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/company_tax/anti_tax_avoidance/timeline_without_logo.png
Malta Independent 09/07/2016 EU anti-tax avoidance directive: Measures to be introduced aimed at curbing abuse
Malta A Regional Center for Strategic Investment and Doing Business p.4, p.5
Times of Malta 28/11/17 Malta is European Cash Capital says European Central Bank

Budgets

#12

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
7
Developments since 2013 have demonstrated that fiscal policy is now expected to meet most standards of sustainability. Indeed, deficit levels have been decreasing steadily; the deficit fell to 2.0% of GDP in 2014 and to 1.5% of GDP in 2015. Significantly, a surplus equivalent to 1.0% of GDP was registered in 2016 and a more moderate surplus of 0.5% is being forecasted for 2017.

As of June 2015, Malta was no longer subject to the EU’s Excessive Deficit Procedure and was placed under the preventive arm of the Stability and Growth Pact. The government is expected to maintain a surplus between 2017 and 2020. However, the EU’s recommendation on Malta’s 2017 National Reform Program continues to stress that age-related expenditure and health care costs could pose a threat to the long-term sustainability of public finances. The introduction of legislation to enhance the transparency of government finances also represents a step forward. In its Second Annual Report, the Malta Fiscal Advisory Council advised the government to broaden its strategic focus beyond traditional headline targets to include numerical fiscal rules and the European Commission’s expenditure benchmark. The 2017 European Commission Staff Working Document on Malta’s Country Specific Recommendations also notes that public outlays have increased at a fast pace. The European Commission document also highlights the fact that wage expenditure in both the education and health sectors has increased over the last five years, while it has remained stable or declined slightly across the EU. A comprehensive spending review is currently ongoing with the aim of analyzing expenditure in various government departments and entities. A number of recommendations made through this process have already been implemented with the aim of generating short-term savings and effectiveness in public spending. A 2016 IMF report raises similar issues, stressing the public sector’s wage bill and spending on goods and services as relatively high, having increased rapidly in recent years. The 2017 IMF report also indicated some reliance on international investment position (IIP) revenues which may be temporary and, therefore, recommended identifying further structural measures to strengthen the state’s fiscal position.

Meanwhile, the struggling, state-owned enterprise Air Malta is no longer entitled to state subsidies and extensive reforms have been recently made to reduce its effects on government expenditures. Though the company continues to generate losses, it is projected that it should break even by the end of the next fiscal year. At the same time, the energy provider Enemalta’s elevated level of government guaranteed debt (about 6% of GDP in 2015) calls for continued close monitoring of its operations, as does the recent government deal to privatize several state hospitals.

Citations:
The Politics of Public Expenditure in Malta in Journal of Commonwealth & Comparative Politics, Vol. 46, No. 1, February 2008, Routledge, U.K. Maurice Mullard, University of Hull & Godfrey Pirotta.
European Economic Forecast Spring 2016 p.100, p.101
National Statistics Office (NSO) News Release 069/2017
European Economic Forecast Spring 2017 p.97
Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Program of Malta and delivering a Council opinion on the 2017 Stability Program of Malta Brussels, 22.5.2017
COM(2017) 517 final p.3, p.4
The Malta Independent 13/04/2017 The Malta Fiscal Advisory Council publishes its Second Annual Report
Commission Staff Working Document - Country Report Malta 2017 SWD (2017) 83 final p.12, p.13, p.14
The Malta Independent 11/12/2016 No more state aid for Air Malta, Brussels confirms
The Malta Independent 19/09/2017 Nearly all Air Malta flights will cost €39 after change in luggage policy, Mizzi announces
IMF Country Report No. 17/56 file:///C:/Users/Fujitsu%20Lifebook/Downloads/cr1756.pdf
Times of Malta 28/11/17 IMF sounds warning on IIP and rising property prices
International Monetary Fund Malta 17/11/17

Research and Innovation

#24

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
6
Given Malta’s finite natural resources, the country’s business R&D sector continues to require substantial development. Public funding must also be boosted. Malta has one of the lowest invest levels in the EU; currently only 0.7% of GDP is spent on research, far below the EU average of 2%. Though in real terms spending has doubled from €31 million (2006) to €61 million (2016), in percentage terms spending has dropped (0.61% of GDP, 2016). The National Strategic Plan for Research and Innovation 2011-2020 highlights the challenges that hinder growth in this area, mainly the relatively low percentage of science and technology graduates. The European Innovation Scoreboard 2017 describes Malta as a Moderate Innovator with weaknesses related to linkages, finance and support, and sales impacts. The 2017 European Commission Staff Working Document however notes that “[i]mportant steps have been taken to strengthen the research and innovation (R&I) system. R&I performance has improved, leading to a narrowing of the innovation gap with the EU average,” and an increase in intellectual property licenses signals a rise in innovation. Nonetheless, the document also highlights that the country’s public R&D expenditure and scientific output are significantly low. As a response to this situation, government has devised a rolling R&I action plan that aims to reduce fragmentation and overlap. Esplora, Malta’s Interactive Science Center, aims to instill a broader interest in science and innovation. Other significant actions include the FUSION program, which focuses on the analyses of companies’ or researchers’ ideas for commercial viability purposes, the introduction of research clusters (e.g., Malta Marittima), the research framework administered by the Malta College of Arts, Science and Technology, the MITA Innovation Hub, and a newly established migration hub.

Citations:
https://ec.europa.eu/research/openvision/index.cfm
National Strategic Plan for Research and Innovation 2011-2020 (Draft for Public Consultation - 2011) p.9, p.12, p.13
European Innovation Scoreboard 2017 p.59
Commission Staff Working Document Country Report Malta 2017 SWD (2017) 83 final p.26
http://esplora.org.mt/
Malta National Reform Program 2017 p.39
Times of Malta 01/12/17 “Very little being spent on research despite surplus”
Malta Independent 02/12/17 Malta holds position as one of lowest spenders on R&D in the EU

Global Financial System

#24

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
7
Malta is a small economy and as such is not a principal actor in the regulation of financial markets. However, it possesses consolidated links with regional and international organizations which help it, through shared intelligence, to combat high-risk or criminal financial activities, ensuring fair cost- and risk-sharing among market actors when a market failure occurs or is likely to occur, and to enhance information transparency in international markets and financial movements. The Central Bank of Malta, Malta Financial Services Authority (MFSA) and Ministry of Finance collaborate closely with similar bodies abroad. Moreover, the Central Bank of Malta operates within the European System of Central Banks. Supranational regulatory regimes highly influence Maltese banking regulations. For instance, the 2014 European Bank Recovery and Resolution Directive was transposed into Maltese law in 2015. In the same year, the Central Bank of Malta introduced the concept of a Central Credit Register, which is “a database which contains non-anonymous information, debtor exposure-by-exposure, of both legal and natural persons, provided by resident credit institutions (banks) licensed by the MFSA” and requires Maltese banks to report end-of-month balances of exposures exceeding €5,000.

The government established the Financial Intelligence Analysis Unit (FIAU), under the Prevention of Money Laundering Act, to help combat high risk or criminal financial activities. The FIAU is responsible for the collection, collation, processing, analysis and dissemination of information with a view to combating money laundering and the funding of terrorism. The unit is also responsible for monitoring compliance with the relevant legislative provisions as well as issuing guidelines to curb money laundering. Although the FIAU forms part of the Ministry for Finance, the unit functions autonomously and has a separate judicial personality. Throughout its years of operation, the FIAU has signed 14 MoUs with other FIAUs and is currently spearheading the transposition of the EU’s Fourth Anti-Money Laundering Directive to Maltese law, including new legislation setting up a registry of companies’ beneficial owners.

In 2017, the MFSA engaged Promontory, an international regulatory consultancy firm, to carry out an overview of the MFSA. The report makes a number of recommendations on the MFSA’s supervisory resources which are now being implemented by the authority’s management. The authority is constantly recruiting and training staff on the various areas which fall under its responsibility. Malta is also a member of MONEYVAL, a European committee of experts evaluating anti-money laundering measures. In its last report (2015), Malta had reached a satisfactory level of compliance comparable to a LC rating. The MFSA recently organized trainings in relation to the MONEYVAL assessment. Recommendations have also been made for tightening oversight of the regulator. However, the Economic Crimes Unit and National Counterfeit Unit within the Maltese Police Force remain relatively weak and the number of convictions and sanctions for money laundering have been low.

Citations:
www.mfsa.com.mt/pages/viewcontent.aspx?id=136
https://www.centralbankmalta.org/ relations-with-international-institutions
Times of Malta 26/10/2015 The impact of the European Bank Recovery & Resolution Directive
The Malta Independent 16/04/2015 Central Credit Register to become operational by October
https://www.centralbankmalta.org/ccr
http://www.fiumalta.org/about
https://www.financemalta.org/publications/articles-interviews/articles-and-interviews-detail/prevention-of-money-laundering-and-funding-of-terrorism-regulations-2017/
http://www.fiumalta.org/library/PDF/misc/Bill_ENG.pdf
https://pulizija.gov.mt/en/police-force/police-sections/Pages/Economic-Crimes-Unit.aspx
Financial Intelligence Analysis Unit Annual Report 2015
The 4th Anti-Money Laundering Directive, An Academic Analysis. A Policy paper by ELSA Malta’s Social Policy Organizing Committee
Reuters 14/11/17 Murder and Money Laundering in Malta
Moneyval (2015) 42 4th Round Mutual Evaluation of Malta
http://www.imf.org/en/News/Articles/2017/11/17/ms111717-malta-staff-concluding-statement-of-the-2017-article-iv-mission
MFSA Annual Report 2016
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