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.