Editorial

Up to just a few weeks ago, the government still believed it could bring the deficit in its finances down to under the three per cent threshold this year, as required under EU rules. Not so today, as the Finance Minister has had to admit, on the same day the European Commission set the deadline for Malta to bring its financial house in order. In fact, not even the European Commissioner for Economic and Monetary Affairs, Joaquin Almunia, had believed it was possible for the island to correct its deficit by this year. This is why the Commission has had to open its excessive deficit procedure against Malta.

Malta ended last year with a deficit of 4.7 per cent of the gross domestic product, arguing this had been a one-off occurrence brought about mainly by the money it had to fork out to fund the early retirement schemes for dockyard employees and the substantial subsidy it still had to give to the energy corporation, even though it had raised the water and electricity rates. Even so, the government still thought it could bring down the deficit to 2.6 per cent. The situation has now changed as the recession is biting into the government's finances, with revenues running at a lower rate than that forecast. Over and above this, public debt has gone up to 64.1 per cent of GDP and is now expected to rise to 69 per cent by 2010.

In the light of this, the language is changing too and the government is being far more cautious about its forecasts than it had been for quite some time. Under the excessive deficit procedure opened against Malta, the European Commission has given the government up to the end of next year to bring the deficit below the reference value in "a credible and sustainable manner". In order to do this, it said, Malta had to rigorously implement the budgetary measures planned for 2009 and avoid any further deterioration in public finances.

The Commission thinks the deficit is no longer of a temporary nature and, contrary to what the government had forecast, it expects the deficit will be of 3.6 per cent of GDP this year. The Commission has not just laid down a deadline within which the country has to comply, it has also set the time, January 7, by which it has to inform Brussels of the measures it plans to take to come into line with its recommendations.

All this, coupled with other depressing economic news, such as the economy expected to remain in recession this year, present a stiffer challenge to the government than that the Finance Minister must have thought the island faced, when he drew up its budget for this financial year.

Finance Minister Tonio Fenech showed greater realism when he reacted to the recommendations made by the Commission. As for this year, he said, it would be practically impossible to meet the deficit target. The economy was passing through a difficult patch and "we don't know yet when the worse will be over".

Parallel to the government's efforts to save jobs through specific aid to firms hit most by the recession, a drive would need to be made to see where the Administration can cut further unnecessary expenditure. The drive would have to be rigorous, also encompassing greater efforts to check inefficiencies and abuse in spending of government funds and payment of welfare benefits.