As expected, the EU has issued a positive convergence report on Malta. Although, the EU gave Malta a creditable pass mark, it made it amply clear that more effort is expected in anticipation of the final examination.

Considering that this admonition emanates from the examiners, it merits serious consideration. Reading between the lines is advisable.

The key advice is that Malta should pursue its efforts towards fiscal consolidation and preserving external competitiveness, particularly through policies fostering productivity growth. Malta must also speed up and finalise the crucial practical preparations to ensure that the changeover to the euro takes place smoothly.

The Commission stressed that Malta needs to “stay vigilant and stem inflationary risks as cyclical conditions improve”.

Sustainability

Joachim Almunia, EU Economic and Monetary Affairs Commissioners pointedly told a Maltese journalist, in the course of an interview, that Malta is in no position to sit on its laurels. “There is still a lot of work to be done after joining the euro to further consolidate the public finances,” he emphasised, adding that “from the point of view of the sustainability of Malta’s public finances, there are some big challenges to be tackled, in particular regarding pensions and the aging population”.

He went on to say that, furthermore, some difficult decisions have to be made by the Maltese authorities if the island wants to increase its competitiveness. “This is the only way forward if the Maltese economy is not to suffer.”

Although there has been a turnaround, Malta has got to where it is now by one-off measures, and its GDP has increased, in part, by government non-productive expenditure – all of which undermines sustainability in the longer term.

On the other hand, outstanding decisions like health care and port reform and the reform of public transport have been left simmering.

Uncontested factors

What will be the final outcome when the pot comes eventually to the boil?

It is an uncontested fact that the turnaround achieved to date rested heavily on restructuring programmes and one-off transactions, and that public debt servicing and extravagant expenditure (too many quangos, Dar Malta and so on) siphoned off valuable resources. Government’s spending requirements, therefore, could only maintain their momentum by further taxation. In many ways, the latter amount to more of the same.

This latter observation was forcefully highlighted by Malta’s leading business institutions, namely the Chamber of Commerce, FOI, MEA and GRTU, as long ago as August 2001. Their pleading fell on deaf ears. The government gave no thought to benchmarking its expenditure levels. Simultaneously, the tax burden increased at a remarkable rate

Narrow view

At that time, the business institutions declared loudly that “fiscal deficit reduction should best be achieved through expenditure reform rather than through further increases in the tax burden.

The business institutions may have taken the narrow view by focusing on the survival of their respective membership (by way of averting increased tax burdens) rather than the survival of the economy.

They limited themselves to a concerted effort “to put a halt to any unjustified wastage of funds on public projects and so on) The corrosive “money no problem” philosophy of those and previous years was not conducive to frugality and even less to good government.

The need to limit the cost of government is, therefore, paramount at all times.

Crucial though it is, this represented the narrow view of the government’s plight, as seen by the business institutions six years ago. The broad view ought to have focused on the creation of wealth. It is this source that provides the lifeblood of enterprise and the sustenance of the economy.

The broad view

The broad view revolves round the fact that Malta, being an independent State, is committed to earning its keep by its own efforts, and this is achievable if we earn the necessary foreign earnings to meet our needs.

In this sector, the private sector provides the brawn. It has to create enough wealth to keep the economy going, and to meet the requirements of the public sector in the process.

The pubic sector is the lung that pumps the air that invigorates the private sector. It does so by attracting investments, facilitates trade and regulates economic activity. Properly managed, the public sector should call on the minimum of the available resources, so that the rest be employed on the creation of wealth.

Lancing the boil

For a long time, the government’s vision has paid scant regard to all this. It concentrated on its own requirements, often at the expense of the private sector. It commandeered excess resources for its own use and aggrandisement, and did so by increased taxation.

As if this were not enough, it resorted to uninhibited borrowing until the situation has been reached where the private sector is being taxed practically to the absolute limit while the government continues to spend in excess of revenue.

Obviously, the kissing has to stop. The spending spree has, somehow, to be arrested.

It is not enough to keep a steady eye on the Maastricht Plimsoll line.

If the lance has to be boiled, the problem could not be solved merely by rising taxation or expenditure reform.

The substantial part of the solution lies (a) in finding ways and means to create new wealth to sustain the economy, and (b) through incentivising the workforce and the consuming community by way of tax relief.

It is not the EU but the Malta Government who is on the spot.

The EU may, henceforth, be breathing down the government’s neck from Frankfurt, and stand in judgement from Brussels.

[email protected]