19 May 2004

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Attacking the deficit

With Malta ranking second on the list of the new EU member states with the highest deficits at 9.7 per cent of the island’s gross domestic product, the government is coming under increased pressure to deliver on the economic front.
The deficit by far exceeds the 3 per cent ceiling imposed in Maastricht’s Stability and Growth pact, the economic requirement that must be respected by adherents to the Euro.
Contacted for his views on what are the immediate measures the government should be taking to curb the deficit, economist and former Finance Minister Lino Spiteri insisted on keeping ministers accountable in meeting the targets.
“It is not enough to wait for the economy to grow, in the hope of a higher tax yield,” Spiteri said. “The government has to address the expenditure side and slash non-essential outlays on what is called ‘discretionary’ expenditure.
“It should also set spending targets with the responsibility to meet them laid on the heads of departments, the parliamentary secretaries and ministers. Failures should attract penalties - sacking in the case of parliamentary secretaries and ministers. The public auditor should be given a brief to review efficiency and value for money in the main spending categories.”
Labour’s spokesperson on finance, Charles Mangion, says the first thing the government should do is to address public expenditure.
“Government foundations and entities spent Lm10 million more last year. Now the government is setting up a unit to control them – we’ve been clamouring for that for years,” he says. “We also have to make sure the government gets value for money. So far the government has shown it has absolutely no control on tenders and contracts.”
Mangion says there are lots of under-utilised government workers who should be employed productively.
“In the long term, we have to kick-start the economy and this can be done best by reviving tourism, because of its spill-over effect,” he said.
“We require an economic plan in the light of Malta’s accession to the EU, and decide what kind of incentives we’re going to grant instead of tax holidays to attract foreign direct investment.
“We definitely don’t afford to have more tax raises because that wouldn’t contribute to the overall economy. It would just raise the cost of living. We need a long-term plan, not piecemeal solutions.”
AD’s Harry Vassallo says the government should only borrow to invest, never to consume. Alternattiva Demokratika is proposing the containment of recurrent expenditure to the forecast rate of inflation over five years of 2.5 per cent. It also proposes the targeting of growth in direct tax revenue to 90 per cent of the mean forecast nominal rate of economic growth over a five-year period, as well as the targeting of indirect tax revenue to the full forecast nominal rate of economic growth of 4.25 per cent.
The Green Party also called for the immediate publication of the expected costs to complete the Mater Dei hospital, followed by a firm commitment to stick to this estimate. Moreover, contributions to government entities must not grow at more than 1 per cent every year. In order to meet the ambitious target of reducing national debt to 60 per cent of GDP, AD recommends the sale of agricultural land to farmers as well as privatisation of entities that are not natural monopolies, including Maltacom.
The European Commission has only begun taking its first steps under the Excessive Deficit Procedure as enshrined within article 104 of the Treaty, which stipulates that Member States with deficits of over three per cent GDP or government debts over 60 per cent of GDP are liable to a report by the Commission to assess budgetary developments within the Member State.
The Commission’s report notes that in 2003, a year of low economic performance, the main economic drivers were high public expenditure. An increase in imports, coupled with faltering demand for semiconductors, a key product, negatively influenced export growth. Despite poor results in the tourist sector, the report predicts a gradual upswing of 1.4 per cent in GDP for 2004, accelerating to two per cent in 2005.
Prices are expected to increase faster in 2004, and then at a slower rate in 2005. The increase in VAT is partly countered by the removal of excises and import duties. Labour costs are also expected to increase by 0.6 per cent in 2005.
The report also notes that the analysis of budgetary developments is still hampered by slow data processing. In particular, a consistent series of fully consolidated data for government revenues and expenditures in 2003 is not yet available.
The 2002 budget forecasts of GDP growth of five per cent in 2003 were described as “unrealistic” in the report, prompting a downwards revision which nevertheless saw a worse outcome in 2003. Budgetary targets were not respected due to the restructuring of the Maltese shipyards in November 2003, which brought about an increase in public liabilities of 3.2 per cent of GDP.

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
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