Work on the 2010 budget has started in earnest. Some consider the statements made so far by the Prime Minister and the Minister of Finance as similar to the oracles of the Sybille: one is not quite sure on how to interpret them.
The 2010 budget will arguably be the most difficult public financial planning exercise undertaken in the last two decades. It will be prepared in a context of a local recession that saw GDP shrink by 3.3 per cent in the first quarter of 2009 and the economy is still expected to contract by 0.9 per cent by the end of this year. Exports in the first quarter fell by 31 per cent and tourist arrivals went down by over 14 per cent in the same period. Inflation in June stood at 2.8 per cent, one of the highest rates in the eurozone.
This scenario is complicated by a global recession that is affecting the country's exporting industries. Moreover, the EU Commission insists that Malta should cut its budget deficit to below three per cent, after exceeding this limit in 2008.
The Finance Minister has already made it clear it is not the time for raising taxes. The Prime Minister was more cautious and tied his commitment not to raise taxes to the condition that tourism will not deteriorate further.
Malta may not be the most heavily taxed country in Europe but there is irrefutable evidence that taxpayers do not always get the best deal for what they pay in taxes. While the government is committed to cut income tax by the end of this legislature, taxes on consumption are bound to increase if the objective of fiscal rectitude is to be achieved. But an increase in VAT will further dampen consumer demand, thereby prolonging the economic slump.
Other sources of revenue could come in the form of a wealth tax, probably in the shape of a property tax. Such a measure would be extremely unpopular, unless it is aimed at a small minority of super-rich people.
So, fiscal planning efforts are likely to be concentrated on the expenditure side.
Elimination of waste will always feature in the government's action plan but it is unlikely to dent the structural deficit significantly. The government continues to commit itself to offer free public medical services and also to leave unchanged the students' stipend scheme. Such commitments leave little room for manoeuvre.
Reducing the number of quangos could be a welcome move but cutting direct productive investment would not. There are already those who argue that the €20 million committed to the Piano project for 2010 could be better used to improve the road infrastructure and Enemalta's electricity generation capacity.
The public service remains characterised by significant under-employment that is siphoning valuable financial and human resources from the more productive sectors of the economy. Reducing the size of the public service through voluntary retirement schemes could start to address this endemic problem.
The conflicting priorities can only be reconciled if the government starts tackling the structural weaknesses in public finances. It needs to look at how the country finances health services, social benefits, educational systems and the other public services. Changes have to be gradual but clearly defined and scheduled over a defined period of time.
Only in this way can the generous welfare system become sustainable. Many will be looking at the 2010 budget to see whether the commitment to a viable social and economic system is indeed solid.