The idea proposed in the pre-budget document of slashing €50 million from public spending next year calls for radical thinking and assertive action. Certainly, the desire to improve the sustainability of our finances is not a mere wish list but a specific warning from the Commission to put our finances on an even keel.

The real challenge is how to trim the fat without making the process unnaturally painful. Definitely this concept of doing more with less is a feature that has obsessed the mindset of the private sector, particularly SMEs, during the recessionary period. Every minister knows that any trivial cuts in departmental costs will only yield a small contribution towards the €50 million target. Yet every drop counts. It is déjà vu all over again – since we have heard it so many times before – that efficiency, effectiveness and economy should be the buzzwords in the public service. Consider how the payroll cost of about €520 million can be trimmed to yield that €50 million. It may not sound too draconian, but in practice it is painful – almost like pulling teeth – for ministers to carve out savings in the region of, say, five per cent across the board. And it can only happen if the mindset is reversed and workers (and their unions) think about maximising output by cutting overtime and possibly working longer hours in the busy summer months. This paradigm shift in thinking will not materialise overnight. Reducing costs and achieving a better throughput to customers has been discussed and promised many times in past budget speeches. Ideally, it starts in earnest in the high-spending departments such as health and social services. Here, procurement and supply chain functions across government departments can be studied to eliminate duplication and thus benefit from a harmonised process of bulk purchasing, while ensuring high quality levels. This is no 13th-century alchemy in action but pure modern management concepts applied in the private sector, where value for money needs to be properly delivered.

Fine-tuning of manpower resources across departments must be undertaken so that surplus or idle hands are redeployed or, in extremis, reassigned to the public/private partnerships. Such fine tuning will not come a moment too soon, given that all the countries that take our exports are going through austerity programmes and that in the private sector, workers such as those employed at ST Microelectronics are grinning while bearing the pain. But the political will must be there first and foremost, where no favours are granted for changing entrenched ways of working that have taken root. The ministers who are selected to administer the medicine have to be supported by their peers, otherwise it will be an uphill struggle with little effect other than cosmetic changes. The aim is to cut fat and not muscle. Why do we have such mountains of uncollected revenue over the years? Some say that revenue-collecting departments can best be outsourced so that maximum benefit is reaped out of efficient use of human and capital resources. This political commitment to the electorate has been repeated so many time that such elusive reforms will end up with a lean, effective public sector.

Such experimentation has been tried in other countries with some measure of success. But can we honestly agree that outsourcing or privatisation has led to a more economic and efficient service to consumers? This is not easy to answer, although some improvements are evident. It definitely makes sense for the Minister of Finance to regularly outsource to the Big Four audit firms assignments to re-design processes or recommend improvements in state corporations and/or government entities. Such assignments are becoming quite common of late and we have seen published reports investigating various sectors such as renewable energy, water and electricity rates, incentive legislation and the outsourcing of tasks to consultants by the Malta Tourism Authority.

Certainly Malta, like others in the Club Med, is facing difficulties in reigning in expenditure, and government needs to think like a business if it wants to cut the deficit. Turning to Britain for guidance, we see how the emergency budget has tightened the purse strings and introduced austerity measures in an unpalatable way. Typically, unless more taxes are gathered then the only way of trimming the deficit is in the cutting of social service and pension allocations. The latter are definitely unsociable and, in the end, a compromise is usually reached to issue amnesties to speed up the collection of millions of uncovered taxes and VAT fines.

Thus in the UK, corporation tax went down from 28 per cent to 24 per cent, with a small profits rate to be cut by one per cent to 20 per cent by next year, which is a smart move to help businesses shore up their difficulties. On the other hand, capital gains tax went up in a hefty chunk of 10 per cent to 28 per cent, and VAT moves up from 17.5 per cent (previously 15 per cent) to 20 per cent, with exemptions on food and children’s clothing retained. There will be a two-year pay freeze in the public sector, with a £17 billion reduction in government departmental spending over the next four years.

Having seen the austerity measures taken by countries such as Britain, it is not surprising to read that locally this is not the best time to reduce personal taxation, as was so cavalierly promised by the party in power last election. Finance Minister Tonio Fenech exclaimed that he did not have the fiscal flexibility to cut income tax from 35 per cent to 25 per cent for managers earning under €60,000.What jars is his jubilant remark that: “Malta had already come out of recession and the first quarter had shown an economic growth of 3.4 per cent”.

Of course, this could be one swallow making a summer, as we observe that in 2009 the Maltese economy shrank by two per cent over the same period in 2008, by 3.4 in the second quarter, by a further two in the third and a significant 1.3 per cent in the fourth quarter. Can we truly say that we are the only member of the EU that came out unscathed in the worldwide recession?

The truth is that we fared better than others, but in 2009 we suffered our fair share of setbacks – both in a hefty drop in exports, notwithstanding the deprecation of the euro, and a 8.4 per cent fall in tourism. Luckily, this year we are – by sheer contrast – seeing some modest and fragile improvement, but we are still not out of the woods. It is pertinent to note in the pre-budget document that a significant share of capital investment does not finance the purchase of new machinery or other equipment. The report points out that a significant share of foreign direct investment pertains to banking institutions that do not operate in the local market. Furthermore, the report is cautious when it says that investment by the private sector in Malta averaged some 15.3 per cent of GDP during the 2000-2009 period – the lowest when compared to the country’s main EU competitors. This level is low even when compared to the EU average of 17.7 per cent, suggesting that a higher level of investment is needed for the Maltese economy to grow at the pace of other EU countries. Equally disconcerting is the Central Bank’s warning that national debt is forecast to rise to 72 per cent of GDP in 2011, which is beyond the maximum limit of 60 per cent allowed under the Maastricht Treaty.

In conclusion, the task ahead for 2011 is daunting, although there are some signs that grass shoots are appearing in our orchard. Let us hope that we learn the lesson of doing more with less, as only thus can we regain competitiveness in a turbulent market.

The writer is a partner in PKF, an audit and business advisory firm

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