The European Commission’s assessment of Malta’s efforts to bring its finances back in shape by 2008 was sweet music for the government on Wednesday afternoon.
The Commission’s overall assessment is positive and indicates that Malta’s programme to bring down the deficit to below three per cent this year and to reduce public debt from 77 per cent to the EU’s 60 per cent benchmark is well on track.
Wednesday’s assessment is encouraging news for the Prime Minister and Finance Minister Lawrence Gonzi, who since 2003 has insisted on the need to cut the deficit and slow down the rate of increase of the country’s public debt. The government’s budgetary targets in this regard seem to have been achieved although – as the Commission pointed out – it will also depend on how rigorously Malta implements the 2006 budget.
According to government estimates, the deficit this year should fall to 2.7 per cent of GDP and then to 1.2 per cent in 2008. This would be well below the criteria established at Maastricht – and well below a level that few in Malta believed was possible three years ago. Dr Gonzi’s government, however, persevered in taking a fiscal position that many still think is overly zealous.
The decisions taken by the government to achieve its fiscal targets – with a fair amount of pressure from the European Union – have not helped to boost favourable public opinion. Rising international oil prices, the increase in the surcharge on water and electricity bills, the eco-tax (or contribution, depending on which side of the political spectrum you’re on) have not exactly contributed to boosting the public’s confidence in the government.
The Commission’s assessment is important for this administration but not of much relevance to the public at large. This means that the coming 24 months will be crucial for the government to boost its credibility and standing among the public. Dr Gonzi and the Cabinet know that with the deficit under control and a programme to reduce public debt under way, they can focus on initiatives to boost the economy and, in particular, boost employment and business investment.
The government now has to focus on carrying out reforms in the health and welfare sectors. Dr Gonzi last week said a framework for pensions reform will be ready by June and Health Minister Louis Deguara announced details of a round of “musical chairs” involving the state’s hospitals. Although no timeframes have been set, the government has little time to play with. With a general election also on the cards within the next two years, the government has to step up the pace a bit more.
Wednesday’s assessment is separate from the assessment of whether a country that has not yet adopted the euro is ready to do so or not. The so-called euro Convergence Report will be carried out in October. However, the government will be working hard to make sure that the country will be in a position to join the eurozone on 1 January 2008.
Introducing the euro currency will be another test for the government and Dr Gonzi will be extra careful that the exercise does not lead to inflationary pressures that could be avoided through better planning and enforcement.
The Commission’s assessment has set the stage for much of what the government plans to do next. Long-term sustainability of government finances remains an important target, but the commission has – we believe – given the government some room to focus on other pressing issues.
Dr Gonzi has kept his promise to rein in the deficit, control public expenditure and keep a low rate of inflation. Now, he and his government have to start working on other promises made in the past three years and before. The government will not lose votes if it breaches the Growth and Stability Pact and there is little risk of that happening. Yet, there is so much to lose if Dr Gonzi and his Cabinet fail to improve the country’s economic fortunes, boost the island’s competitiveness and convince the public that the short-term suffering was worth it, after all.