Governor calls for 'critical review' of public spending

Public spending on welfare, higher education and health must be "critically reviewed" if the government is to make better use of its resources, Central Bank governor Michael Bonello has warned.

However, difficult decisions of this kind would be taken much faster and more effectively if a bi-partisan approach were adopted, the governor said.

Addressing the annual dinner of the Malta Institute of Financial Services on Friday in the presence of Prime Minister Lawrence Gonzi, Mr Bonello underlined the importance of adopting the euro, but stressed that it was not enough in itself.

In the context of a continuing fiscal consolidation process, increasing recurrent spending is clearly not an option; neither is an increase in taxation receipts.

The governor said Malta's eligibility for EU funds is likely to decline after 2013, while the burden of an aging population in terms of health and pension expenditures will then be much heavier than it is today.

It will, therefore, be important to devote more resources to investment, enabling the economy to generate additional wealth in the meantime.

Mr Bonello pointed out that, although recurrent revenue has been increasing steadily, it has often not been able to keep up with recurrent expenditure.

A guiding principle should be that investment is channelled into productive activities that generate the highest returns, while profit signals should not be distorted by monopolistic market structures, subsidies or protection.

The level of productivity in Malta has remained more or less unchanged since 2001 and is projected to increase at a relatively slow pace in 2007 and 2008.

Mr Bonello noted the limited amount of resources allocated to productivity-enhancing activities, and particularly to research and development investment.

He considered it important that the size, flexibility and skill level of the labour force be enhanced, and that the institutional and physical infrastructure be made more amenable to attract high value-added foreign direct investment.

During his speech, Dr Gonzi lauded his government's achievements, saying that all economic sectors registered an improvement when compared to last year.

In the first six months of the year, the economy grew by 2.6 per cent in real terms, clearly showing that the economy had now picked up.

The prime minister emphasised the need to continue eliminating inefficiencies within the public sector and, where beneficial, divest government assets and encourage more public private partnerships.

The country also needs to analyse its national health and pension scheme and take the necessary action to further strengthen their viability.

The government is working on the updating of the Business Promotion Act to ensure that it can offer important incentives to attract foreign direct investment in line with EU regulations.

Dr Gonzi spoke in an optimistic note on the euro, saying that in view of the fiscal consolidation and economic progress, joining the euro in January, 2008, seems "all the more likely".

While the deficit and debt criterion is on track, the inflation rate was the main challenge, he said.

"However, I am convinced that we will also meet this objective as our rate of inflation is forecasted to decline within acceptable levels in the next few months," he said.

Pegging the Maltese lira entirely to the euro has continued to give the economy the necessary stability with the prime minister saying he saw no reason why it should not be sustainable in the final run-up to joining the single currency.

By working together with the Opposition there was no reason why the transition to the euro would not be smooth.

Dr Gonzi lauded an agreement within the Code of Conduct Group on Business Taxation last week, which cleared Malta in connection with the state-aid rules by the College of Commissioners earlier this year.

Following discussions with the industry and the Opposition, draft legislation will be presented to parliament shortly which will be beneficial to Malta's future and vindicates the government's efforts to maintain its tax imputation system.