Budget 2010: A focus on economic recovery

The ongoing global recession pressures have not left the Maltese economy unscathed. Our economy is itself in recession, driven by a lower demand for exports of goods and services as well as a slowdown in domestic demand. In such conditions, the government has an important role in stimulating and stabilising the economy. Therefore a wider fiscal deficit during this particular point in time is not only to be expected but is very much a necessity.

It is however important that such a deficit would be sustainable through mechanisms which would turn it into a surplus during an eventual economic boom. If such a situation does not prevail, we would be putting ourselves at risk of creating a level of debt which is not sustainable.

Indeed, a number of EU countries have been forced to rein in their looming budget deficits following the strong stimulus packages which they had to undertake to safeguard their financial systems and encourage economic activity. Countries such as Spain and France have had to increase taxes while others such as the Netherlands have had to undertake significant cuts in expenditure. Thankfully, the financial system in Malta has proven to be resilient to the international crises and required absolutely no government intervention to sustain it.

In this respect, the Budget for 2010 has sought to achieve a number of socio-economic objectives some of which are of a short term nature and some of which are of a longer term nature. At a sectoral level, the Budget has taken into consideration the vulnerability of certain sectors such as manufacturing and tourism which have been hit hard by the current economic conditions. The provision of a €2.5 million reserve fund to assist enterprises in temporary difficulty, as well as measures directed towards the needs of SMEs are bound to help.

The budget however has not only focused on these vulnerabilities but has also sought to provide incentives for those sectors which have been resilient to the recessionary pressures and which have significant growth potential. Furthermore, a number of measures, the benefits of which are most likely to be reaped in the longer term, such as incentivising enterprises to engage in international competitiveness and growth enhancing avenues offered through research and innovation have also been addressed.

On a social level, the Budget has also attempted to address, subject to the obvious constraints on fiscal expenditure, the adverse impact of the expected increase in utility tariffs. While the government has an important social obligation to play in terms of alleviating part of the financial pressure, emphasis on enhancing efficiency in terms of energy production and use must remain of paramount importance.

This said there are two issues in fiscal management which need to be carefully addressed. The first is the fact that with the demographic and social pressures building over the years, welfare expenditure has tended to crowd out other forms of productive expenditure which can bring about genuine economic growth. While a number of important and innovative initiatives have been put forward in the 2010 Budget, it would have been desirable for such initiatives to be backed by an even greater outlay of financial resources, which however was not possible due to the recurrent commitments for fiscal expenditure.

The second is that the real effectiveness of the Budget proposals will depend on the speed and efficiency with which they are actually put into practice. More effective implementation and monitoring systems are warranted towards this end.

Overall, the package of measures put forward in the Budget for 2010 can be viewed to be sensible also because its formulation was sensitive to a number of key priority issues which have been raised by the social partners within the Malta Council for Economic and Social Development. It is refreshing to observe the maturity exercised by social partners during the Pre-Budget Consultation phase in identifying issues of national interest which need to be urgently addressed.

It is also encouraging to note that the government has heeded some of these suggestions. This notwithstanding there remains the need to continue to address other crucial issues identified by social partners including the efficiency of government operations as well as the sustainability of the social welfare system. It is thus augured that issues of national interest continue to be addressed within the framework of social partnership, so as to enable our economy to face the challenges and to reap the opportunities which lie ahead.

The author is a freelance economic consultant and lecturer at the University of Malta.