Every economy has to address three challenges: what to produce, how to produce and for whom to produce. There are two extremes: either all choices are determined by the government or else market forces dictate.

All nations are mixed economies, with some opting for relatively more government intervention and some for less. The right question to ask is whether government is performing its functions – and whether it is doing so efficiently. In other words, is there too little or too much government and are taxpayers getting good value for money?

From a microeconomic perspective, governments are expected to correct market failures. In practice this implies the provision of goods and services by society for which a private sector solution is difficult to achieve – for example, the provision of police services.

Another role for government is to intervene in markets where someone’s behaviour creates adverse or positive effects, since in this case the private sector solution could be sub-optimal. Examples of this type of intervention in Malta include the scaling up of car licence fees according to the year of manufacture, and the subsidies offered to households who invest in solar energy, in both cases to reduce the amount of pollution.

From a macroeconomic perspective, government economic stimulus is justified when an economy is experiencing or facing a threat of recession. The recent reductions in utility bills and higher public sector employment can be interpreted along these lines.

Another important role for government is to enhance the country’s productive potential. The initiatives aimed at attracting more women to the labour force and investment in upgrading human capital through education are examples of such supply side policies.

Governments’ actions to achieve a better distribution of income, through a progressive tax system and the social welfare system, are also justified since this ensures higher wellbeing by reducing crime. The fact that economic growth in Malta in recent years compared favourably with that in other EU member states shows that the chosen combination of demand management and supply side policies are bearing fruit, while at the same time, pockets of poverty are very much circumscribed.

The fact that economic growth in Malta in recent years compared favourably with that in other EU member states shows that the chosen combination of demand management and supply side policies are bearing fruit, while at the same time, pockets of poverty are very much circumscribed

But government activities which do not meet these microeconomic or macroeconomic criteria can be deemed unjustified. There are cases where the government gets involved in activities which can be catered for by the private sector. Government should proactively identify such activities as this would free up scarce resources and ensure that public finances remain sustainable. This is also necessary to reduce the risk of ever increasing government spending (referred to as Wagner’s Law), which would necessitate ever increasing taxation.

In particular one needs to distinguish between the funding and the implementation of an activity. It is possible for government to limit its involvement to funding and let the private sector deliver the output. Government’s role should quality assurance, ensuring that the output is in line with expectations. A transparent and competitive tendering system should then allow for the delivery of the output by the most efficient provider. In education and health this approach has to some extent already been used but can be extended further. Similar policies should likewise be implemented in other areas.

At the same time, greater resources should be allocated to regulatory functions. The rule of law is a precondition for sustainable growth and better living conditions. Authorities need to be equipped with human resources of the highest calibre and have at their disposal the best type of technology. Otherwise there can never be a level playing field.

So far the prominent role played by the public sector in Malta has never been questioned, particularly as tax revenues and the willingness of households to buy government bonds have sustained the growth in public spending. However, as recent examples abroad have shown, some countries suffered a brutal turnaround in their fortunes which forced a massive scaling back of their governments. This should serve as a lesson for Malta: better be proactive, and reassess the role of government now.