"Mission accomplished." So declared a banner behind President George W. Bush on May, 1 2003. Since then more US soldiers have died in Iraq then during the war itself. In this age of media clutter, it seems that politicians have come to believe that people have very short memories. On Budget 2007 day, our Prime Minister proudly declared that "We have achieved our objectives".

It was a bad start for the recently-appointed communications and press secretary at the Office of the Prime Minister. At a time when the government's credibility was already on the rocks, many people were hoping there will be a break from the rhetoric and political spin that characterised past budgets. It was not to be. Even though the Prime Minister claims that this is not an election budget.

When all the din surrounding the budget dies down, we will still have to live with the stark realities facing our economy and society. Many commentators seem to have missed the most critical point. The primary scope of good fiscal (and monetary) discipline is the control of inflation. A budget which proposes to lower the deficit and to reduce public debt should result in a lower inflation rate. This rate in September 2006 reached 3.42 per cent.

The government has failed miserably on its most important objective. The government continues to spend and to tax more; bridging the deficit through the selling of assets. This is not sustainable, nor is it in line with the spirit of the Maastricht criteria. The government continues to blame the price of crude oil, but it knows that there are other structural forces at play within our economy; as the study undertaken by Joseph Falzon, entitled Exports, Inflation And Value Added (October 2006), has substantiated.

Another matter of grave concern is the continued widening of the gap in the current account of our balance of payments. This gap in the January-June 2006 period reached Lm123.4 million. The real growth rate of exports of goods and services at 3.2 per cent was outpaced by that for imports which registered a 4.1 per cent increase.

Private consumption expenditure is still growing and remains unduly high. The higher prices of fuels have not helped but the recovery of exports by ST Microelectronics has. Discomfort with this rapid growth in imports of consumer goods and a further acceleration in inflation had prompted the Central Bank of Malta to increase the central intervention rate last May.

The government has been elated about the economic growth rate which after years of relative stagnation reached 2.6 per cent and was higher than the estimated 2.3 per cent registered by the EU25.The problem here lies in what is driving local growth. As stated in the Economic Survey, domestic demand has been the major contributor to our growth. Demand by the private sector grew by 2.3 per cent and by the government three per cent. The figures for the EU25 are 1.9 per cent and 2.1 per cent respectively. So our economy is growing at a faster rate than the EU25 because we are consuming more.

On the other hand, in Malta, gross fixed capital's contribution to GDP grew by 3.8 per cent while that of exports of goods and services fell by two per cent. In the EU25, the figures are 4.4 per cent and 5.9 per cent respectively. Much of the growth in the EU25 is due to higher exports and investments.

Also, the government's economic consultants should be seriously thinking about the ramifications of the continued erosion of direct production in the economy. Although the shift towards services is welcome as it tends to be more congenial to the characteristics of small island economies like ours, it may have serious implications for future productivity growth. This is particularly true of those services such as wholesaling and retailing which are not directed at the international market such as tourism, e-gaming and financial services.

The performance of manufacturing and tourism industries, the two main pillars of our economy, is also worrying. The only real positive signal coming out of the first is the growth of the pharmaceutical industry. Malta's main competitive advantage results from a loophole in the international patent system. This too is not sustainable; we should be exploiting this "borrowed time" to put this industry on a more sustainable basis.

The sad state of our tourist industry is a story on its own. When will the government stop blaming "increased international competition" for this state of affairs? As if our tourism has ever been immune to international competition.

Persistent whitewashing of our economic performance will get our society nowhere. The Prime Minister in his budget speech stated that "In the future, society will remain much stronger than the state". In the meantime, the business of the government in the economy continues to grow. He concluded by declaring that together we can build a better future. Undoubtedly, Malta has a lot to offer if we all get our act right. If only we stick to basics.

fms18@maltanet.net