The media this morning probably carries extensive coverage of Budget 2015 which the Minister of Finance presented to Parliament yesterday evening. And yet, much of the surprise element of past budgets is gone.

There was a time when finance ministers used to keep the content of budgets close to their chest up to the Budget speech. Most citizens waited with apprehension to learn how the Budget would affect their standard of living. This is now changing radically. Since the recent euro crisis, the EU has taken extensive measures whereby the budgetary process has become an ongoing exercise with a multi-annual perspective.

And as long as Germany continues to insist that fiscal discipline comes first and then economic growth, it is inevitable that the Budget is more about proper financial management than as a tool regulating the momentum of the economy.

In 2010, the EU finance ministers agreed to empower the Commission to explore ways of how to improve the coordination of economic and budget policies of member states.

This eventually led to the ‘Euro Plus’ pact, which was signed by all the eurozone members as well as Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania. This pact incorporates the Treaty on Stability, Coordination and Governance (TSCG), which obliged all signatory states to enact legislation establishing a self-correcting mechanism under the surveillance of an autonomous fiscal advisory council.

Last July, Malta complied with this commitment when the Fiscal Responsibility Act was enacted by our Parliament. As directed by the TSCG, our government is now obliged to publish a three-year rolling plan listing its fiscal policy and priorities. Every spring, the Finance Ministry has to submit what is known as the stability programme. The purpose of this programme is to enable the Commission to assess whether our country is on track in reaching the budgetary objectives (or is, at least, on an appropriate adjustment path towards them) as set out in the three-year plan.

The Budget is inevitably conditioned by the parameters set by the European Commission

On the basis of its assessment, the Commission issues advice to the government as to what needs to be taken into consideration before key decisions are taken on the national budget. So the Budget is inevitably conditioned by the parameters set by the European Commission; this a priori requirement is considered to be the ‘preventive arm’ of the European semester.

Then there is also a ‘corrective arm’ which revolves around the ‘excessive deficit procedure’ and is triggered if our Budget deficit exceeds three per cent of GDP. In this case, the Council makes re-commendations as to corrective action that our government is to take and sets a deadline for bringing the deficit back to below the threshold.

Before presenting the Budget in Parliament, the government is now obliged to present a draft Budget to the European Commission. This draft was made public by the Malta government last month. So although as I write the details of the Budget speech are not known, there are good indications as to the main issues covered.

The weekly cost of living compensation (COLA) is a meagre 58c. This has already raised significant controversy but it has to be remembered that the mechanism has been in place since 1991. It is a far from perfect mechanism but it has surely guaranteed stability in industrial relations. The government had no choice but to abide by this mechanism until such time that the social partners agree otherwise.

It is interesting to know what specific measures the government will be taking to supplement this compensation and raise the income of target groups (such as minimum wage earners and pensioners). The ‘child supplement’, introduced at the start of this scholastic year, is one such measure.

It will benefit 9,000 families having 22,000 children considered to be at the risk of poverty.

Significant reforms in the social security system are planned to cut abuse and make work pay. Such measures, although long-awaited, are bound to be politically-sensitive and reflect the government’s bullishness as to its continued popularity among voters.

Probably, the Budget also includes tax incentives to encourage voluntary pension schemes. Another already known measure is that the top tax rate on incomes not exceeding €60,000 will fall to 25 per cent. To partly compensate for this, there will be greater reliance on indirect taxation, even though the VAT rate will remain unchanged.

Another known measure is the cut in electricity tariffs for business by 25 per cent. Given the tax element in the price of energy products, falling oil prices too will have a negative impact on the government’s finances. The drop in oil prices will be partly offset by the continuing strengthening of the US dollar relative to the euro.

Stable labour costs and the depreciation of the euro are likely to enhance the competitiveness of our exports, including revenue from internet gaming.

Budget 2015 is not without its minefields. The financial situation of Air Malta remains challenging. The situation in Libya (a critical revenue stream for our airline) is not likely to stabilise in the very near future.

Hopefully, Air Malta will benefit from lower fuel prices. Too many questions remain around the public transport system and the bearing it will have on the public purse.

All in all, Budget 2015 confirms that our economy is doing well even as the eurozone continues to falter. Next year, Malta’s economic growth will accelerate to 3.5 per cent and this, undoubtedly, makes it easier for the government to reach its fiscal targets.

fms18@onvol.net