Over 145 million euros are earmarked in 2012 for this so-called direct contribution by Government by way of a grant to the private sector in terms of the Social Security Act of 1987. The total top up for both public and private sector employees comes to just over 191 million euros. 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 euros. The size of these outlays should be of concern for two reasons. The shortfall 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. One suggestion for alternative financing would involve a multi-year programme that would reduce the government’s matching contribution gradually over an extended period of time, ideally through a tripartite consensus at the MCESD. This programme would be financed from productivity growth. 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 automatically be suspended during times of slower growth.
Thus, in terms of labour cost competitiveness, Malta has kept pace with the euro area average. However, to maintain competitiveness a further focus on the wage setting process may be appropriate. In particular the basic principle must be to emphasise that productivity improvements are at the basis of sustained wage increases, and that these are best negotiated at firm level, where improvements in productivity can be best gauged. Consequently, any cost of living adjustments should form part and parcel of the collective agreement and not be superimposed on collective agreements by legislation as happens today. Indeed, already a number of collective agreements incorporate the COLA increase, and I suggest that this should be the norm. Another important message that has emerged from the sovereign debt crisis is the need for fiscal prudence, which provides the space for countercyclical fiscal policy during a downturn. In the euro area, fiscal policy is the major macroeconomic management tool at the national level. Thus, in periods when economic activity is relatively strong, policy needs to be sufficiently prudent to build the necessary fiscal buffers that would be utilized during periods of weaker growth. BIS central bankers’ speeches  5  In the aftermath of one-off expenditure during 2008, the deficit ratio in Malta declined in 2009 despite the recession of that year and narrowed slightly further in 2010. The debt ratio generally declined until 2008, but then picked up in 2009, partly in response to the contraction in the economy.