The main thrust of the Budget is usually to create jobs. A corollary to that is to protect employment. There is no doubt that the Minister of Finance will keep these two related objectives in mind when he rises to deliver his Budget Speech on October 25. It remains to be seen whether his declared foremost objective will allow him to contribute enough towards the two traditional aims.
The minister has already made it clear that this year his foremost target will be to reduce the structural deficit to three per cent or under. The days of running a deficit above that level should, to his mind, end in December of this year. He wants to fall within the parameters imposed upon us through membership of the European Union.
In this regard various local economists have warned over time that the Finance Minister must not be more holy than the Pope. He should not do anything that acts as a brake on economic activity and thereby inhibits economic growth.
The logic is clear and correct, which is why the minister has a balancing act to perform that is more challenging than ever. The economy is growing. In the June quarter it grew fairly briskly. But on an annualised basis it has more to go to reach its potential. Moreover, the export sector of the economy remains threatened by external factors beyond the influence of anyone in Malta.
Our main export markets still face problems, some of which could deteriorate rather than diminish. The UK economy is a prime example. The relative weakness of the pound sterling has permitted a recovery in that country’s exports, and thereby a contribution to somewhat more pronounced economic growth.
But the country has yet to feel the impact and experience the effects of the coalition government’s plans to cut back the massive budgetary deficit. That will be attempted in a ratio of four to one as regards public expenditure and taxation. This means that out of every million pounds shaved off the deficit £800,000 will come out of public expenditure and £200,000 out of new taxation.
The British government hopes that the contractionary effect of public expenditure slashing will be compensated by increased activity in the private sector. Whether that will happen is, in reality, anybody’s guess. Leading business people in the UK, some of them from within the Conservative ranks, have applauded the Chancellor of the Exchequer’s cutting plans.
Economists are split in their forecasts. A leading economist formerly linked to the Bank of England is among those who last week warned that the savage cuts to be made by the Conservative Liberal coalition could throw the UK into a slump. Should that happen, the inflow of tourists from the UK, still very important to the Maltese economy, could falter.
Other markets face the same predicament, implementing budgetary austerity in the hope that the private economy will more than compensate for public cuts.
Back in Malta, the Finance Minister has made it clear that he has directed all the ministries to do their utmost to cut their spending. A precise figure is hard to define, but it could be around €50million. Whether that will be after or before allowing for natural underlying increases in expenditure due to the payment of the statutory wage increase is not clear.
Once the public details given do not specify the areas of public expenditure targeted for cutbacks, an estimate of the potential impact on jobs could not be given. The likelihood is that, unlike its British counterpart, the Malta government will not lay off public sector employees. In all probability it will exercise more stringent control on replacement employment, barring in the health and education sectors.
The Finance Minister, in fact, has made it clear that he will not be seeking cutbacks in expenditure in the education sector, a wise decision provided expenditure continues to be made effectively, efficiently and with wide open eyes on value for money. I rather hope, too, that the Finance Minister will find a side pocket from which to give some additional funds to spend on the social sector, which belongs to the same ministry as the education sector, over and above the social security increases linked to the statutory Cola increase. Those at the margin need special attention, even in times of austerity, hard though that might be to effect.
The planned reduction in the statutory deficit could act as a brake on economic growth, unless the private sector more than makes up for it. Whether that will happen remains to be seen. The phenomenon of the burgeoning financial sector is now apparent – a high proportion of the capital inflows do not go to finance spending in Malta, but often flow out again. Add to that the effect of a net dividend outflow, as seems to have happened in the June quarter, and the phenomenon becomes clearer.
The Finance Minister has to read through all this and much more to see to it that his primary objective to reduce the budgetary deficit by some 25 per cent over this year does not translate into undue negatives for the economy. I understand that the Treasury is already under pressure to collect enough revenue in the last 10 weeks of the year to reach the target set for 2010. That, for 2011, will be harder still to achieve.