The government should follow the lead taken by most EU countries and introduce self-enforced budgetary rules, the Central Bank Governor said yesterday.
Such rules limit governments’ discretion over fiscal policy, forcing them to limit expenditure or balance budgets and preventing them from racking up deficits without considering the longer term repercussions.
The aim is to prevent governments from racking up deficits without considering longer term effects- Josef Bonnici
In his first speech as Governor, former Cabinet minister Josef Bonnici made a number of proposals concerning economic policy (see box).
Chief among these was a call for expenditure rules. Prof. Bonnici argued that having such rules in place would help prevent situations where the government was forced to cut the deficit while not slowing down economic growth.
He admitted that setting such rules would involve “the difficult task of setting priorities” but insisted that the necessity to cut expenditure in one place to increase spending in another was “an essential feature of budgetary management”.
Budgetary rules such as expenditure limits have experienced a surge in popularity in the wake of the global financial crisis as governments have had to come to terms with the implications of high deficit and debt levels.
Prof. Bonnici also warned that the government’s topping up of pension contributions, due to cost €191 million in 2012, was unsustainable, given Malta’s ageing population. He suggested cutting the government’s contribution “over an extended period of time” through an income system linked to growth in productivity.
The system would see income tax or national insurance rates rise marginally whenever economic growth exceeded a pre-established threshold with the additional income used to reduce the pensions’ contribution. Whenever growth slowed down, the rates’ increases would be suspended.
Such a system, Prof. Bonnici said, could be discussed within the Malta Council for Economic and Social Development and “would be justified as one which reallocates resources from current to future consumption” during times of economic prosperity. Prof. Bonnici also spoke about the sustainability of the government’s capital expenditure, suggesting the establishment of a development bank that could, among other things, make better use of government-owned immoveable property.
There were words of warning for Malta’s competitiveness, with Prof. Bonnici singling out the island’s inflation patterns as needing greater attention.
The inflation rate has averaged 2.5 per cent since 2004, compared to the 2.1 per cent EU average, and Maltese inflation has shown volatile traits when compared to that within the eurozone.
“Although imported inflation is inevitable, we have to be particularly mindful of locally-generated price pressures or inflexibilities in structures,” Prof. Bonnici warned.
He noted that Malta’s competitiveness would be better served if cost of living adjustments were incorporated into collective agreements and, therefore, related to productivity improvements rather than imposed by legislation.
Domestic banks could be forgiven for feeling somewhat pleased with themselves, with the Governor praising them for having “played a crucial role in preventing a more severe downturn in economic activity... and in averting a sharper deterioration in public finances” thanks to their prudent behaviour.
He was, however, adamant that the Central Bank would play no part in providing large-scale liquidity for banks’ loan and investment activities. “The Central Bank expects such institutions to look primarily to the markets for their funding requirements,” Prof. Bonnici said.
The Governor’s proposals
To the government:
•Introduce budgetary expenditure rules, balancing the books come Budget Day.
•Gradually lessen the contribution to private sector pensions.
•Remove “needless bureaucracy” hindering investment.
•Integrate COLA increases into collective agreements.
•Discuss public health care’s “sustainability challenges”.
•Establish a development bank to help raise capital for infrastructural projects.
To the banking sector:
•Expand loan loss provisioning levels, especially in construction.
•Be prudent in dividend policies to strengthen capital buffers.