The EU Commission advice to Malta

This coming weekend the heads of government of the EU member states should be meeting in an informal summit to discuss the international economic situation. In the meantime the European Commission has issued an opinion on Malta's adherence to the Growth and Stability Pact.

It may have sounded rather odd that the EU Commission would have commented on the fact that the fiscal deficit has exceeded the limit of three per cent in relation to the gross domestic product, especially since other countries have gone well beyond the three per cent limit and not just marginally, as happened in the case of Malta, and in the light of the exceptionally negative international economic environment.

What also emerges from the EU Commission report is that were it not for two very significant one-off items, Malta would have had a deficit to GDP ratio of around 1.5 per cent. The deficit for last year was expected to be at 3.3 per cent. However, included in this deficit is the money paid for early retirement schemes paid to the Malta Shipyards workers in preparation of the privatisation of this entity. Also included is the subsidy paid to Enemalta Corporation last year, when fuel prices were escalating to unprecedented levels, in order to keep utility prices unchanged. These two measures amounted to one per cent of the gross domestic product and 0.8 per cent respectively.

Thus the arithmetic is very easy to work out.

The monies paid to the Malta Shipyards workers closed the chapter on the cost of the shipyards to the Maltese taxpayer in a definitive way.

On the other hand, we seem to be still grappling with the water and electricity rates. It seems that for the trade unions involved it is not enough that the Maltese taxpayer paid for the additional fuel bill through taxes, while subsidising the higher users, such as high income persons. Their stand seems to be one where the taxpayer continues to subsidise such people, even though the average man in the street could very well have adopted energy-saving measures at his home.

In terms of the debt to GDP ratio, the EU Commission advice was also very positive. The report highlighted the fact that the ratio between the general government gross debt and the gross domestic product has fallen consistently in the last years from a level of 72 per cent in 2004 to 62.8 per cent last year.

It needs to be stated that the results of this policy of fiscal prudence were not achieved at the cost of jobs or wealth generation. In these last years employment has continued to grow as has the gross domestic product, that is the wealth generated by the country.

No one can fault the way the government has managed the economy in these last years, which essentially was nothing more and nothing less than what the public expected.

Looking forward the report indicates the expected budget deficit will still remain under the three per cent threshold, which means that government is not burdening future generations with unsustainable deficit to deal with the severe international economic slowdown.

The extent to which it will remain under the three per cent threshold will ultimately depend on the level of the gross domestic product. The international recession will hit us, and there is no way of escaping that. However, we can make the negative impact on our economy more severe if there is a crisis of business and consumer confidence. We need to continue being able to attract foreign direct investment in the manufacturing sector and the services sector, in spite of the difficulties in the market.

Frankly we need to put local issues on the back burner for a while in order to tackle the economic issue in a comprehensive and intelligent manner.

The business sector needs to exploit any opportunities that it perceives in the market and make full use of the various forms of incentives being offered by the government.

On the other hand, employees need to appreciate that during these difficult times, having a job is of paramount importance. Can these two requirements be reconciled? I believe so, if there is good will.

In my opinion what is also critical is the stance adopted by government. So far it has not panicked into action, and I strongly believe that it should not panic into action.

Its initiatives need to be well focused to reap the maximum benefits and to contain costs. This requires a safe and yet strong pair of hands. The EU Commission advice to Malta indicates that those managing the economy do have these safe and strong pair of hands.