As always, Prof Edward Scicluna has imparted a valuable analysis of government’s economic direction (MaltaToday, “How To Read The Budget”, 22 October). There is no question that beyond the domestic measures initiated by Lawrence Gonzi to assuage his electorate, this budget has to be considered as an instrument within the long-term vision for adopting the euro currency. So the way Budget 2007 affects Malta’s preparedness for the euro, is crucial. Once again, it’s a matter of sustainability.
The EU believes that in 2007, the island’s structural deficit – without counting any sale of assets or one-off earnings – will not be below the 3% of GDP mark, even after it is cyclically adjusted. With that in mind, Gonzi will have to make a good case for Malta’s suitability for the euro zone, and prove Brussels that the economy is really ready for the single currency, and that his economic vision is really putting Malta on the right track.
So when one considers the hard work ahead for the government, the fact that over Lm12 million in tax savings and other exemptions for the electorate have become suddenly affordable for the state, after warning of just Lm8m with which to give people a breather, becomes questionable.
Why didn’t government instead forge ahead with the assiduous deficit-cutting programme and rein in its spending, rather than buying acquiescence with more consumption measures? Why does it still choose to ignore the generous profits reaped in by corporations in our oligopolies, the banking and telecoms sectors, to instead impose – judiciously – a higher rate of taxation for big companies and give SMEs some visibile tax savings?
To consider that its past two budgets had been so clearly addressed at telling Brussels that Malta was on its way to euroland, this year’s budget is obviously pandering to the electorate just ahead of a possible early election in late 2007.
But that too, might not be the case. By the middle of next year, Gonzi will be getting a sure answer of how Malta has fared in its bid to adopt the euro. If Malta does fail the exam – a political blow to the Nationalist government – there is the likelihood that Gonzi may stay on to present another budget. At this point, it would be regrettable to veer off the convergence programme, although the prospect of an election in 2008 can expectedly force open government’s fist by sliding more cash to boost domestic consumption.
What’s so contemplative about the EU’s nagging fears on Malta’s preparedness, is how it ridicules the zealousness of the government’s programme for the euro. Reducing the country’s deficit and debt to sustainable levels is an obligation towards the electorate irrespectively of whether or not we are to join the euro. But in hindsight, when one considers Malta’s rigid programme to achieve its ambitious target for 2008 to enter the euro zone, it’s pardonable to think what a glutton for self-aggrandisement the government can be.
Politically, it seems that the ambitious road to euro accession is all about conjuring up yet another odyssey for the EU’s smallest member state. But economically, we find ourselves today having to accept a fixed peg to the euro – which has shackled us in competitiveness limbo – and most worryingly, there’s the prospect that the EU might actually consider devaluing the exchange rate when it comes to fix the irrevocable rate in mid-2007. The irony, with Labour delivering the comedy and the electorate swallowing up the tragedy, would be heartbreaking.
Did Malta have to pick 2008 as its euro destiny? Apparently not, at least not when one considers what the onerous criteria for the Maltese economy to qualify are in such a timeframe.
But having picked this date, it was expected that Gonzi should have stuck by his cautionary pre-budget disclaimer, that only Lm8m were to be afforded in tax cuts or benefits. This was a sign of prudence, and serious dedication to the long-term sustainability pf public finances.
If Brussels does give Malta’s euro bid a negative verdict, there is the prospect that the Nationalists will not call an election in 2007. Instead, the worst-case scenario would be that of veering off the deficit reduction programme slightly again, keep the electorate buoyant, and possibly leave the next government to pick up the pieces. The feelgood factor would be nothing but a Potemkin village.
The Maltese people need a promise. Real reforms – aimed at cutting inefficiencies in non-deliverable sectors but strengthening government’s role in crucial sectors – and the promise that the government will forge ahead with its deficit reduction, cutting down on public debt, and reforms to the overmanned civil service, the financing of the health system, meaningful port reform, and the creation of the second pillar on pensions.