Can we take a leaf out of Obama’s hymn book and sing our way to deficit reduction. For the uninitiated, 2011 was an exceptional year in American history when its deficit rose to more than 10 per cent of the economy. The bitter truth is that similar high deficits occurred during the Civil War and World Wars I and II.

Certainly Malta’s deficit is lower than US but we have not tackled it forcefully since the structural deficit started plaguing our budgets. Does Obama’s assessment of the US malady match our own diagnosis concluding that the patient’s high fever is due to a structural deficit? Over the past two decades we omitted to address it. Just follow the incantations emanating from the Central Bank governor in a recent speech. Malta certainly would need to take the bitter medicine to cure its debt mountain. But is the political class willing and able to implement austerity measures? Not really… we seem to glide along, patching the shortfall in state finances by adding more stealth taxes… just stop and consider how Mepa has tripled its charges (but added more than half a million in new salaries, and parliamentarians got €4 million in arrears) while other agencies have followed suit. A barrage of fines and interest charges are routinely issued by income tax and VAT departments even to struck-off or dormant companies. Certainly a piecemeal approach but what can you do when there is uncertainty in international markets, starting with the Middle East and neighbouring countries that are coping with civil disorder, as well as lost production in Japan.

Back to Central Bank governor Michael C. Bonello. He has exhorted the faithful to cut costs and called for a plan to reduce the deficit to achieve a higher level of investment without raising taxes. Naturally, recurrent spending must be cut. But how can the minister of finance juggle the figures to trim costs when the unions are asking him to fork out new subsidies for increased prices on fuel, gas, water and electricity bills. Forum president John Bencini stressed that workers expected compensation because they could not make ends meet. The swift reply from government was that our fuel prices are lower than those charged in Europe. This is true but only marginally; petrol costs €1.44 in the EU compared to €1.38 locally. This is spurious accuracy since our national wages are less than 60 per cent of the European average. Motorists driving on potholed roads complain that the government gets more than €50 million from car licences but spends the miserly sum of €6 million a year to maintain the road infrastructure. The rest goes to meet other exigencies. A dichotomy prevails here as one notes that austerity is dancing with profligacy. Thus private industry is shocked to hear the relative high salary packages granted to top government appointed CEOs but not grant compensation for inflation. One can only cringe that some of CEOs perks are tax-free. All this comes to into play when the sans culottes ask for compensation to meet creeping inflation in everyday life.

This is a paradox given the steady advice from Central Bank exhorting the government to tighten its belt and trim freebies and surplus staffing wherever possible. It is not a cry in the wilderness but the condensed wisdom of a number of illuminati and other academic bigwigs. So why not heed the governor’s golden words and start weeding the garden and trimming the hedges as is the case with Ireland, Greece and now Portugal. It is true that these countries have seen their economy shrink over the past three years whereas ours triumphed with a 3.7 per cent real GDP increase in 2010. By comparison, growth in the euro area is expected to reach only 2.8 per cent in 2011. Can we act gung ho and praise the Lord for our own higher growth rate? Not really and, given our fragile recovery, we cannot rest on our laurels. For us to catch up with other rich EU members, we need a consistent five to six per cent increase in GDP. One cannot be pusillanimous and lament that we cannot reach such giddy heights since our resources are limited. We must dig in and do some soul searching to discover why our exports are becoming more uncompetitive. The unions blame this on government-induced inflation. As an example, take fuel tax, which, as oil prices increase, the government automatically collects more tax on a fixed percentage basis. Why can’t Enemalta reduce its tax collection as they did in UK to stabilise pump prices?

Mr Bonello continues to plead with politicians to regain competitiveness through adjustments in the real economy. His comments are “ prices and wages have to increase at a slower rate over time than the average in the euro area”. He goes on to remind us that “the adoption of productivity-enhancing measures, increased competition in domestic markets and a wage-setting process must reflect efficiency gains rather than past inflation.” One may ask: where is our Achilles heel once we had turned the corner last year and registered a modest GDP increase? The answer can be gleaned from the governor’s address when he reminds all and sundry that our economy is vulnerable due to its openness (not to mention the negative repercussions of the Libyan crisis). Perhaps one may say that our economy is much stronger than Portugal, but in the final analysis it is foolish to ignore the telltale signs of mounting debt. These are the warnings repeatedly delivered by Mr Bonello.

Typically, the governor announced that following an average annual inflation rate of 2.0 per cent in 2010, the Central Bank has forecast that prices will increase by 2.5 per cent in 2011 and by 2.4 per cent in 2012. Both rates are higher than the corresponding euro area inflation forecasts. Inflation, like salt, can be the killer on the table. Yes, not to mention concerns by expert economists that our welfare system is not sustainable. This covers free healthcare for all. Undoubtedly, studies and committees on pension reform have been carried out in the past decade but nothing tangible as yet has been done to bridge the gap. Mr Bonello suggests that reform is an urgent matter that should not be discussed by political parties. Quoting from the Central Bank report, he warned that Malta’s per capita income level is being “artificially supported by government deficit spending” and that it was crucial to introduce a mandatory and privately-funded second pillar pension without delay. Does this mean that the strategy of deficit accounting is fallacious as it is artificially propping our economic growth and without its support we face a contraction? If so, then it is no exaggeration to imply that we are living a dream, spending beyond our means and all this bubble is financed through domestic borrowing. Can we stop and ponder when we can start pulling up our socks and through belt tightening recoup savings by cutting waste and duplication in the public service. This cliché is now so worn out that it is almost laughable. Is it honourable to leave this legacy of debt to our children and grandchildren? The answer is a simple no… we can only admire the sterling efforts made by the Obama administration to cut its Herculean sized deficit.

Laying out a broad framework to reduce the federal budget gap by $4 trillion over the next 12 years is a gargantuan task for Obama. In a speech at George Washington University in Washington, D.C., he proposed what he called a “balanced approach”, meaning a mix of spending cuts and tax increase. In a stoic attempt to solicit political support from Republicans he said: “We have to live within our means, reduce our deficit, and get back on a path that will allow us to pay down our debt.” Obama would target government spending from the Pentagon to the Department of Agriculture trying to save $400 billion in current and future defence spending. Can he pull the trick by exhorting a bipartisan review of US deficit? We wish him well.

To conclude, our politicians should put aside their differences and pull on the same rope as Obama is trying to do with his monumental task styled “Framework for Shared Prosperity and Shared Fiscal Responsibility”. It is worth giving it a try.

Mr Mangion is a partner at PKFMALTA, an audit and business advisory firm.

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