Economic stimulus: Public investment better than lower taxation - Governor
An increase in public investment should be preferred to lower taxation or higher benefits, should the government be considering a new economic stimulus, the Governor of the Central Bank has argued.
"An increased stimulus in the form of lower taxation or higher social benefits is not as cost effective as an increase in public investment expenditure. The latter is to be preferred since it tends to generate a smaller demand for imports, while raising the economy's potential output," Michael J. Bonello wrote in the Bank's annual report.
He also insisted that fiscal prudence remains necessary to safeguard both Malta's credit rating and investor confidence.
Mr Bonello said that in the current recessionary conditions, the only areas where a case could be made for higher discretionary public outlays were in sectors such as manufacturing and tourism, which were being increasingly impacted by the sharp contraction in foreign demand.
"A number of constructive initiatives have already been taken in this direction. Going forward, it will be important to recognise that public funds should be used to support activities that promise to be viable in the medium to long term."
Mr Bonello also argued that the resources to finance these additional outlays should be derived in part from savings elsewhere. He said two areas which offered scope for efficiency gains were education and healthcare systems.
"These together absorb more than 25% of general government expenditure and both are characterised by relatively less efficient outcomes in terms of output compared wit the EU average. The need to achieve savings in these areas is also accentuated by the growing fiscal burden of an ageing population," Mr Bonello said.
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Mark Galea
Apr 11th 2009, 16:57
Increasing rates of interest to the maximum allowed by EU law contributes much more to reduce imports.
S. Calascione
Apr 11th 2009, 16:32
US financial aid at tertiary level (so called "Title IV Regulations") is a well proven and sustainable model and is socially & economically responsible. Regulations need to be rigorous, to reduce risk, this being a sizable component of the US loan market.
With a similar framework in place, opportunity in the financial service sector would be spurred (comparable in magnitude to the housing loan market, in the long run).
Student loans have proved to be one of the best performing, low risk sectors in the US banking. There is nothing to stop similar legislation being implemented here. It is only a matter of culture. Both main parties must to agree on the underlying rationale.
Because these loans are extremely long term with monthly payments stretched out over the working life of the student, right up to retirement, they are always affordable to a motivated student.
The education sector can contribute much more to the development of the Maltese economy. There is a social aspect too. Students are guaranteed all necessary funding to pursue lifelong training programmes, underpinning personal and professional development.
Joseph Vella
Apr 11th 2009, 12:43
The governer has a point, however there should me a widening of income tax cuts especially for the low and middle income earners, who are most likely to spend a large percentage of their disposable income. We also have to keep on putting an effort to invest more in alternative energy and education
Josephine Cassar
Apr 11th 2009, 11:33
Lower taxation is needed so that those on lowest income brackets-workers AND pensioners can benefit as it is always the higher income brackets who benefit and this will also provide an incentive for those registering for work or single parents as they will have to fork out less; seeing those who have a hefty wage-packet benefit from lower taxation is also counter productive besides being an unjust burden.
Joe Sammut
Apr 11th 2009, 10:54
What is very strange is that Mr Bonello is arguing in favour of subsidies via cuts in education and healthcare.
Students who were promised full stipends........pls note.
Healthcare at a price.........let the people beware.
What this "nice" country needs is a boost in competitiveness and incentive for work. Through lower taxation. The country's middle class (it's real economic motor) needs a real stimulus.
Michelle Wood
Apr 11th 2009, 10:22
Don't know about the rest but I wouldn't complain if taxes were lowered!
Dr Paul Sant Cassia
Apr 11th 2009, 10:14
Very sensible advice from the Governor. Well-directed public investment (and/or certain tax-breaks) is more efficient than lower taxation at this stage, which will merely translate itself into higher consumption. I would also add further reinforcement to his comments on the public sector. Apart from having one of the most bloated public sectors in the EU, indeed exceeding many ex-Communist countries, it is also one of the least productive - not just because of the general poor quality of personnel (with some honourable exceptions), but also because Government-imposed bureaucracy which is diabolically labour intensive, complex, and designed to justify unjustifiable over-employment. Many of the established "Authorities" are a disaster. To date there has been no scientific study of the expense in labour time required by the public in dealing with them - all this results in a loss of national productivity. In short, the State is regrettably one of the main producers of the reduced productivity of the island, but it seems congenitally unable to tackle itself.