Government urged to set recurrent spending priorities

Central Bank Governor Michael C Bonello has called for a closer alignment of the country’s priorities with the economy’s strategic objectives and for a more efficient allocation of resources.

“What I am advocating is not austerity but enlightened self-interest. It is a commonsense appeal for a closer alignment of our priorities with the economy’s strategic objectives and for a more efficient allocation of resources," Mr Bonello said last night as a dinner hosted by the Institute of Financial Services.

"Against a backdrop of weak and uncertain global growth prospects, the policy focus must be on releasing resources to make the long-term investments needed for sustainable growth," he insisted.

Mr Bonello said the country must look beyond the prevailing upturn to examine structural weaknesses preventing the economy from exploiting its full potential and, thus, from closing the income gap with European peers.

The time had come to consider how to strengthen the Budget process, drawing on models tested successfully abroad. These typically involved fiscal rules providing for limits on supplementary budgets, multi-annual expenditure ceilings and more transparency in fiscal policy-making as well as an independent monitoring agency.

“The pursuit of fiscal sustainability along such lines requires a broad political consensus,” Mr Bonello noted.

Noting the “subdued global prospects”, Mr Bonello said it would be naïve to assume the economic upswing in Malta would continue “spontaneously without determined efforts to achieve faster growth”.

The key to a better quality of life were rising incomes, he said, adding that the focus had to be on productivity and competitiveness.

Mr Bonello warned that, in view of the uncertain prospects for Malta’s export markets, the assumed nominal GDP growth rate of 5.6 per cent, on which the tax revenue forecast for 2011 was based, could turn out to be optimistic.

TAXATION

Referring to deficit reduction, he said that this was typically achieved through a combination of increased revenue and expenditure cuts. In the case of more revenue, Mr Bonello noted that relying mainly on higher taxation could not be an option “at this juncture; besides, it generally distorted the efficient allocation of resources”. Higher indirect taxation tended to push up the price level and, hence, harmed competitiveness while higher taxes on income depressed economic growth.

“Neither, of course, is this a time for cutting taxes. An option which is at once fiscally beneficial and socially desirable is to close remaining tax loopholes and to engage in a more aggressive pursuit of tax evasion and benefit fraud,” he said.

The country, he said, had to cut spending while rebalancing it.

“The only real alternative, however, is to cut public spending. There is a near-consensus in the literature that expenditure cuts have a smaller adverse impact on the economy than revenue increases. Fiscal consolidation, moreover, produces long-term benefits because a smaller debt stock results in lower interest payments and, thus, can eventually create room for growth-enhancing tax cuts.”

The dual challenge of maintaining a high level of investment spending while cutting the Budget deficit, therefore, implied it was recurrent expenditures that must be cut, he said.

The need to prioritise expenditure programmes had not been fully addressed and, as a result, “the most difficult challenges, such as how to ensure sustainable funding for tertiary education, pensions and health services, remain to be tackled”. Also, domestic consumption had to return to a sustainable level.

ATTITUDE TO GOVERNMENT HANDOUTS 'MUST CHANGE'

Yet, Mr Bonello said, people continued to expect the government to hand out money it did not have. “This attitude must change, for not only can it lead to bankruptcy but it is also indefensible on moral grounds. Politicians, trade unions, NGOs and other opinion shapers must explain we do not have money for everything and that you cannot have gain without pain. The intelligent thing to do is to work together so as to minimise the pain and then ensure it is equitably shared.”

Mr Bonello expressed his view that the priority of the welfare state should be to provide equal opportunities for all with a safety net only for those who needed it most.

“The social welfare system, including healthcare, has long been identified, including by the European Commission and the IMF, as offering the greatest potential for savings,” he said.