‘The economy is suffering from a lack of potential’

MEP Edward Scicluna, who is expected to be given a senior economic Cabinet post should the Labour Party win the election, is interviewed by Anthony Manduca.


The Labour Party’s electoral campaign has largely focused on non-economic issues, such as political reform and energy. Is this because the Labour Party acknowledges that the economy is doing well?

I prefer Tony Blair to Brown or to Hollande, they are not my role models
I think the economy has been emphasised all along. We have said we want to rely on economic growth; economic growth being the fountain of various remedies or changes. When you talk about energy, the economic impact of it is certainly very large. In fact we are relying on it as one of the mainstay of increasing the rate of economic growth because it’s a beneficial supply shock.

How would a Labour government’s economic policies differ from the policies of the present government?

On three fronts. The first is government finance. This Government has shown good intentions when it comes to government finance; it has no choice because it is part of the eurozone, but it knows that at some time in the future, we must start having a surplus rather than a deficit. Also the debt must come down. The problem is that it never happened. We’ve never seen the debt coming down, and the deficit has been playing around, first over three per cent, then under three per cent, but not convincingly under three per cent.

The second front is the economic one. When we joined the EU we were more concerned with public finance than with economic growth. We have not been attentive enough to see which sectors have been hindering economic growth, such as regulating agencies and bureaucracy, and why growth is so lopsided. It’s more on financial services and igaming and less on manufacturing and small industry.

The third front is inclusiveness. There is a token of inclusiveness but the Government has a lot to answer for when reports show that poverty and relative poverty have increased over the last five or six years. This is of concern for a government which wants to be inclusive.


How would you tackle the question of poverty?

On one hand you must ensure that there is a social safety net but at the same time you don’t want that to be a hindrance to economic growth or the motivation to work. That’s the balance you need to find.


Would a Labour government consider reforming the welfare system?

We signed up to the Active Labour Market Policies, just like the PN and AD did. Before they were flagged up by the UHM I always talked about the fact that people on social benefits must have an incentive to go out and work. At the moment the system is penalising them, telling them stay where you are, it’s not worth working. Now we have to change the system whereby you sort of taper off the benefits, over one or two years, whereby if they were to find work, you will not cut all the benefits at one time. We want work to pay, that’s the signal of the active labour market policies.


Are you saying people who are unemployed don’t have an incentive to work?

You would be surprised. We say man is a rational animal, and people won’t go anywhere unless there is an incentive for them to improve. So when we say these are not good for anything and they don’t want work, it is because at the moment it pays them to stay where they are. The system encourages them to stay where they are. You have to change the system to encourage them to be at work.


To achieve this will you lessen their benefits?

The whole taxation benefits system, the government has more than €3 billion from it, it’s the whole taxation part and another €3 billion in expenditure, and together they are like the reins on a horse, you can pull and push, and you goad the system to be pro-work, and at the same time being kind towards the underprivileged.


Considering the economic records of previous Labour governments, why should the business community, indeed the electorate, trust the Labour Party with managing the economy?

We can talk for hours and hours about our economic history, at the moment I’m not interested in it at all. The electorate has ahead two policies to choose from, what the government wants to do for the future and what the current Labour team wants to do for the future. That’s what we have to discuss.


You recently wrote an article praising Mintoff’s economic policies, for which you were criticised. Why should voters believe Labour has changed?

Independent people who read the article told me it was a very fair and balanced article. I don’t recall any other economist except myself who criticised the Mintoff government in the early 1980s for its wrong exchange rate policy. Where it was good it was good, where it was bad it was bad. I am not saying this with hindsight, I said it then. Now I would like to look at the future and compare the two programmes.

"Reports show that poverty and relative poverty have increased over the last five or six years."
“Reports show that poverty and relative poverty have increased over the last five or six years.”

The business cycle depends on business confidence. Can a Labour government inspire confidence in the business community?

The government has always played the feel good factor, unfortunately ignoring the supply side of the economy. The feel good factor is the demand side in that you want people to spend more because it’s beneficial for the economy. The economy has been suffering from a lack of potential. In other words its horse power has been falling. And it is the government that is saying that, not us. In the last official document to the European Commission a chart shows that our potential economic growth has been falling from six per cent to four per cent to three per cent and now from two to one and a half, and for the future we would be lucky to reach two per cent.

There are reasons for that, and that is what we want to address to increase economic growth. Once Europe and the eurozone exits this recession, we should have the spare capacity to grow with it, but if our potential rate remains at two per cent, we are condemned to grow at two per cent and that is not good enough. We will never converge with the median European income unless we grow faster than Germany, France, Italy, all taken together. We need to grow by at least four per cent if we want to converge in say, 15 years time to that median.


I am sure you are aware of the government’s economic performance compared to other eurozone countries.

At the moment the situation is not good and we are as good as our potential economic growth allows us, which is about two per cent, so when the economy improves in Europe we will reach the two per cent.

We are saying let’s increase the potential by increasing the labour force, that’s where labour force participation rate comes in, and investment which has been falling to a miserable 14 per cent of GDP when it was previously 25 per cent. Both on the investment and on the labour force, more efficiency and less early school leavers, there is the supply side factor.


Are you, and is the Labour Party, 100 per cent committed to Malta’s membership of both the EU and the eurozone?

I don’t think there is any question about that. In my case I never had a question even at the very beginning.


Do you acknowledge that this government did a good job in getting over €1.1 billon in EU funds for the 2014 – 2020 period?

We are definitely pleased. We noticed though that on the structural funds we have gone down but we can’t help it, we are no longer Objective 1. We hope the EU budget will be accepted by the European Parliament. I’ve asked the leader of my group, Mr Swoboda, and he told me that the issue is still in the air, very uncertain. One possibility is that the budget will only be approved on a year by year basis.


What Cabinet appointment are you expecting in the aftermath of a Labour victory?

That’s the prerogative of a Prime Minister.


Karmenu Vella and Charles Mangion are both spokespersons on economic policy. Is there room for three of you in a Labour Cabinet?

Honestly, I would leave that to the leader of the party.


The Labour programme talks about reducing the tax burden. How will this be brought about?

We have two plans. One is to get economic growth, which I’ve spoken about and which we intend to reach above 3.2 per cent.

That is what we are hoping for and working towards. With time taxation will be falling and so will expenditure. When we talk about expenditure we are referring to expenditure to GDP ratio. We are projecting that the taxation burden will slowly be coming down.


Are you 100 per cent in agreement with the PN’s pledge to reduce the top rate of income tax from 35 per cent to 25 per cent over a three year period starting in 2013?

Although this looks like a significant move, keep in mind that the 35 per cent will still be there [for income over €60,000]. I can assure you that we will be keeping our eyes on the income distribution. The middle income sector are the main providers of taxation; they are our future in terms of aspirations, of sending their children to the best schools, they want to be tomorrow’s leaders, and they are providing the public coffers with taxation. Now they are very dissatisfied. Instead of helping them the government has been hindering them. So this would help them and help the economy grow and and help us take care of the low income group.


So the income tax cuts will take place over a three year period starting in 2013?



How does a Labour government plan to reduce Malta’s debt and keep the deficit at a sustainable level?

At the European Parliament I’m working on the eurobond report, where at some time in the future the eurozone will issue an international European bond, like the US does. A redemption fund will cream off all debt over 60 per cent from the various eurozone countries including Malta which will be paid off over a 25 year period by the countries themselves. Then you can start from a clean slate whereby we can have a eurobond fund which allows us to borrow internationally at a lower rate.

In the short run, however, our plan is to stop the debt ratio increasing. Many things contribute to the debt ratio growing, and we need to stabilise this. Then we can say we are no longer going towards the danger zone, which is over 75 per cent. We don’t believe in austerity programmes and we’ll avoid them like the plague. We want the economy to grow and we’ll do everything possible to stop the debt from growing.


Labour talks a lot about the need to reduce bureaucracy. Can you mention come concrete measures that will be undertaken to bring this about?

Bureaucracy is an added burden and endangers jobs. It grows especially from certain authorities. Sometimes the means becomes the end itself. We want a clean environment, safe industry and workers’ rights upheld but beyond that we don’t want the added bureaucracy. For example if an apartment changes ownership, the process needed to switch the W&E bill for the meter is so bureaucratic you need a notary, which is ridiculous. There are hundreds of these examples.


Will a labour government change anything with regard to Malta’s financial services and igaming set-up?

I was chairman of the MFSA under both a Labour and a Nationalist government, I’ve sold Malta in New York and London and I’m very proud of that. We will definitely continue to push these sectors.


No changes?

Only in response to changes which we might have to face from time to time coming from the regulatory regime in Europe which unfortunately is changing to our disadvantage.


How does a Labour government plan to increase foreign direct investment to Malta?

International organisations measure attractiveness by certain characteristics, such as bureaucracy, corruption and taxation. We were marked down in the World Bank report and given a value below many backward countries. That report needs to be examined. Singapore and the Nordic countries for example are clean and efficient, that’s how we attract foreign investment.


Among European social democratic leaders, past and present, who is your role model? Francois Hollande? Gordon Brown? Tony Blair? Jose Luis Zapatero?

I think the first five years of Tony Blair would be my role model. There was so much energy there, they moved to the centre and they could talk to business. Obviously after those years it became complicated, the war, so on and so forth. I prefer Tony Blair to Brown or to Hollande, they are not my role models.



– The Times of Malta : Thursday, 28th February, 2013

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