The budget deficit and the downturn

The Finance Minister has now initiated the consultation process with social partners in the run-up to the 2010 budget. In formulating this budget the government needs to balance pressures to address the now large budget deficit, provide a stimulus for economic growth, address rising inflation and modernise public services. This is by no means an easy task.

However, unlike many other foreign governments, the Maltese government was not forced to rescue the local banking sector and the additional stimulus provided by the government to the economy in 2009 was limited. Hence it is evident that the budget deficit for this year did not solely emanate from external international pressures, but is rather a symptom of a lack of forward planning, prioritisation and financial control.

This implies that pressures from the European Commission to address budgetary issues by 2010 is a fair assessment of Malta's economic situation. This position should be reviewed if externalities which may occur in the next 12 months will impact government revenues and expenditure significantly.

If the government is serious in addressing the current budget deficit while ensuring that the economic recovery is accelerated, it needs to address seven key points.

Firstly, it is important that the government clearly sets out its priorities for the country stipulating targets for economic recovery, investment and exports, development of new market niches, tourism and the improvement in public services as well as cost reduction and elimination of inefficiencies.

Secondly, it is time to ensure that the budget formulation process is viewed as a rolling programme as opposed to a yearly programme. This is critical to demonstrate commitment to the government's priorities over the short to the medium term. Back in the 1990s, the government had invested significant effort in introducing business planning processes across administrations. However, it is widely known within the public sector that limited consideration and review is given to these business plans during the annual budgeting process.

It is now important to make the budgeting process more professional.

Moreover, the process should also ensure that initiatives funded in 2010 will focus on creating a multiplier effect in the Maltese economy while demonstrating commitment to other priorities in future years.

Thirdly, it is important that the government lays out its holistic plans to modernise public services. It is acknowledged that some ministries have already devised blueprints such as the one focused on improving Malta's transport sector. In doing so, the Prime Minister and the Minister of Finance need to indicate the short-term as well as the longer-term investment required in health, education, transport, law and order, regeneration and other public services. Moreover, the government should clearly set out plans and clear targets to reduce inefficiencies in government operations.

The fourth thrust which needs to be considered by the government is the introduction of a robust programme, portfolio and project management across all government initiatives. This is important to ensure that initiatives which have been funded are realising the expected benefits. This will also ensure that non-performing projects may be terminated and funds reallocated and that the government may respond to emerging requirements during the year in an informed manner. This requires a radical change in government bureaucracy.

The fifth point focuses on the sources and approach to financing public services. Over recent months some ministers have alluded to the use of public-private partnerships as an alternative delivery mechanism. While such PPP financing may be considered off-balance sheet, it is important to understand how such financing mechanisms operate. Entering into such partnerships, the government will be committing expenditure over a long-term period which often exceeds 20 years. Hence it is critical for the Minister of Finance to set out policy on the matter to maximise benefits and ensure that such commitments do not constitute an excessive percentage of government expenditure. Given the small size of Malta, the risk is that a few of such public-private partnership deals may constitute a major component of future government budgets and hence may limit future funding of other initiatives because funds would have been committed over the very longer term. This reinforces the earlier argument for improved planning and prioritisation.

The sixth point is that the government needs to present a clear plan to curb inflation which is running at around 3.5 per cent while eurozone inflation is at around 0.5 per cent.

This situation will certainly lead to justified claims for cost of living wage adjustments. The situation will not be improved unless the government can clearly demonstrate planned interventions to curb inflation which go beyond simply creating a new agency. If such a plan is not enacted, Malta runs the risk of losing some of its competitiveness.

The seventh and final point of advice which is addressed to the Prime Minister is to ensure that his Cabinet is organised in a way which can deliver. It is evident that the current large budget deficit, rising inflation and the issues associated with the economic downturn are major challenges.

The Minister of Finance should focus solely on ensuring alignment of funding and revenues to government goals and introducing discipline in managing finances. On the other hand, I advocate the appointment of a new minister to focus on enterprise, industry and innovation. This will demonstrate commitment to industry and enterprise and will ensure a focus on investment promotion and intervention as required. It is now time to act.

Mr Mizzi is a senior programme leadership professional.