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Pre-Budget 2014 and beyond

There will be no major surprises in Budget 2014. “The Budget will be based on the electoral programme and will cater for the projects announced throughout this year,” stated the Prime Minister (Times of Malta, August 2).

For Joseph Muscat what matters, at least at this stage, is political stability. He goes out of his way to convince us that it is business-as-usual. But make no mistake things are changing.

Pre-Budget 2014 is indeed built around the Government’s electoral programme. As is to be expected, the reduction in electricity tariffs occupies central stage. This measure will leave more money in the pockets of our families and will help boost their consumption. This, complemented by the further reduction of the income tax ceiling for middle income families from 32 per cent to 29 per cent, is expected to be the main economic growth driver (conservatively estimated at 1.6 per cent) in 2014. This growth rate is only marginally higher than this year’s. A number of other measures will also help boost economic growth. Sectors that will be given a boost include maritime, the creative industries, tourism and construction.

A special effort will be made to generate new jobs in Gozo as well as for school-leavers, through the Youth Guarantee Programme.

These initiatives are meant to yield quick results. Others, such as the programme to eradicate illiteracy and precarious work, as well as the national water management plan, will have a longer term impact.

Pre-Budget 2014 also confirms the Government’s determination to bring the excessive deficit procedure instigated by the EU against our country to a speedy end. It seeks to appease the European Commission by addressing all the recommended corrective measures. The availability of more and free childcare facilities and increased after-school care (through Club 3-16) are meant to encourage greater labour participation, especially among women.

A Pensions Strategy Group has been set up, to assess the feasibility of introducing incentives related to voluntary pension schemes (the third pillar) as a first step towards further reforms in our pensions system.

Equally important are the significant changes that are being implemented behind the scenes which impact the way the government Budget is prepared and implemented. Hopefully, these reforms will bring Malta closer to the practices of more modern public administrations and do away with obsolete practices.

The emphasis is to shift on what is achieved rather how much is spent. It is superfluous to keep talking about how much Malta spends on education, what matters is what is achieved whether in terms of outputs (a lower number of early school-leavers) and outcomes (less youth unemployment).

There needs to be increased fiscal discipline and accountability throughout the budgetary process. Since May, the Finance Ministry has been carrying out a review of departmental spending plan to ensure taxpayers’ money is being spent cost-effectively. The setting up of an independent fiscal institution to monitor compliance with fiscal rules is most welcomed.

Perhaps, the biggest challenge is for the public sector to become citizen-focused and to improve its strategic management capabilities.

There needs to be increased fiscal discipline and accountability throughout the budgetary process

Since the early 1990s, there have been various attempts to cultivate a strategic planning culture that identifies the needs of the unit’s customers.

Practically no organisation has the money and other resources necessary to meet all the needs of its customers/citizens and strategic management is necessary in determining priorities.

In the circumstances, the FInance Ministry is being obliged to adopt a top-down approach which gives guidance from the outset as to what level of resources can be made available.

As Finance Minister Edward Scicluna explained: “Before it was a bottom-up approach with each ministry making yearly requests that made sense to them… But there was no ceiling and then the haggling started to see what we could afford” (The Sunday Times of Malta, August, 11).

Today, the public sector has the possibility of going back to Parliament, half-way through the financial year to seek supplementary estimates and make good for expenditure over-runs. This practice is likely to be stopped and replaced by a contingency reserve.

It is also time to start moving in earnest towards a fully-fledged accruals accounting system.

With regard to the Budget as an economic tool, the pre-Budget 2014 document acknowledges for the first time that competitiveness requires more than just macro-economic stability. It notes that Malta’s competitiveness is due to “industry specific factors rather than general macro-economic conditions”. This deserves an in-depth study as it is becoming obvious that our economic development model is resulting in a dichotomy between enterprise and national strategies relating to innovation and value creation.

Higher investments in education and training, though important, will not solve this problem. While it is legitimate for our policymakers to promote a diversified and balanced economy (in the search for risk minimisation), this comes at a cost. Diversification per se does not necessarily lead to higher or a sustained increase in value-added.

Vision 2015 was a grandiose exercise that proved to be a non-starter. The new Government needs to embark on a national exercise that reassesses the real state of our economy and determine the challenges and opportunities that lie ahead: tomorrow and the day after.

Pre-Budget 2014 is but a first step in this direction.

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