Unfinished business

The effervescence of the political debate on the budget for 2010 has slowly fizzled out. The emphasis, as usual, was on the tactics adopted by the government to address the short-term issues that are arguably affecting our economic performance. The longer term strategies that will ensure that our economy upgrades itself in the next decade remain as unfinished business.

It is hardly surprising that as the country struggles to move out of recession, all seems to be quiet on the more significant reforms front. The political spin that completely engulfs the media coverage on the budget ensures that the harder painful issues that we need to address remain hidden from the public.

A thorough analysis of the income and expenditure patterns of the government in the last several years reveals a hard core of structural imbalances in public finances. An important statement made in the Economic Survey published with the budget was practically ignored by most analysts.

This comment relates to the structural deficit in our public finances. This deficit amounted to €340 million in the first nine months of 2009. The autumn update on the Maltese economy issued by the European Commission confirms that the structural deficit in our public accounts increased from 3.1 per cent in 2006 to 4.3 per cent of GDP in 2009. Put simply, we are consistently consuming more than we are producing.

Yet, we hear little about how the political parties intend to address this debilitating weakness. I am often amazed at how the media delve deeply in the short-term measures announced in annual budgets, but treat serious reports prepared by economic experts who are completely detached from the idiosyncrasies of local politics. I am referring in particular to the IMF report on the Maltese economy published by the IMF last June and the more recent autumn update by the European Commission on the Maltese economy.

We need to know how the government of today and that of tomorrow intend to implement their spending plans. It is not enough to talk of efficiency savings or closing down unnecessary agencies. Spending by government departments need to be trimmed substantially if we are to eliminate the structural part of our deficit. Areas previously considered as off-limits must be considered for cuts. Government expenditure amounted to 38.1 per cent of GDP in 2007, while this year this is expected to reach 42.2 per cent.

Kate Stanley, a deputy director of the Institute for Public Policy Research in the UK, states: "The task of cutting public expenditure should not just be approached in a negative way. Spending restraint should be seen as the catalyst for long overdue reform. If the public sector faces an age of austerity, it needs to use it as an opportunity for a comprehensive re-examination of what it does and how it does it."

The crisp report prepared by the IMF last June clearly highlights the areas where we still have unfinished business in the economic reforms programme. For instance, this report gives great importance to the forging of a social pact to preserve cost competitiveness. "A social pact negotiated between the government and the social partners could offer a useful vehicle to forge consensus on policies". Hidden between the lines of this statement are the authors' fears of protracted inertial in promoting change as a result of our polarised political system.

The financing of our social welfare system is similarly brought under the microscope in the IMF report. "Healthcare and education also stand out as areas needing rationalisation, especially as the population ages. The authorities have so far relied on attrition to reduce public employment; a more practical approach is called for, based on a general review of public services needs to identify areas for consolidation."

While the government is again forecasting an inflation rate for 2010 almost double that forecast for the eurozone area, the IMF report has a stark warning on this issue. "The competition authority needs to adopt a more proactive stance, expeditiously addressing any monopolistic behaviour in the wholesale and retail markets, while the regulated segments of the markets should be liberalised. Adequate capacities and institutional independence should be granted to the competition authority."

Before these and other debilitating issues are addressed by tangible action plans, our long-term economic prosperity will be put at risk by unfinished business.

jcassarwhite@yahoo.com