Mercifully, much of the heat generated by the Budget has died down but a financial storm in Europe over renewed fears that governments of the weaker eurozone countries may not afford to repay their huge debts has once again brought to the fore the importance for the Maltese government to keep to its commitment to focus on fiscal consolidation. This time it is mostly Ireland that has hit centre stage, though Portugal and Greece remain very much in the financial limelight – all for the wrong reasons, of course.
Who would have thought that the Celtic Tiger, the envy of the smaller countries in the European Union, would also come to cause financial turmoil in the space of just three years?
As the construction and property boom that fuelled the Irish economy in the 1990s burst in the wake of the credit crunch, the government had had to bail out the banks, pushing up its deficit to a staggering level of 32 per cent of gross domestic product. Even without the €50 billion bailout cost, the deficit would still have come to as high as 12 per cent, way over the three per cent threshold laid down by EU rules.
By comparison, Malta’s deficit is this year expected to be of 3.9 per cent. As the government has so often said before and after the presentation of the Budget, only two of the EU member states, Malta and Estonia, reported an improvement in their deficit last year.
A glance at the deficit figures of the rest of the countries is quite revealing. According to official figures, in 2009, the largest government deficits in percentage of GDP were recorded in Greece – 14.4 per cent, Ireland – 14.4 per cent, the United Kingdom – 11.4 per cent, Spain – 11.1 per cent, Latvia – 10.2 per cent, Portugal – 9.3 per cent, Lithuania – 8.6 per cent, Slovakia – 7.9 per cent, France – 7.9 per cent and Poland – 7.2 per cent. Not one single member country registered a surplus.
It is somewhat ironic that, against the sombre economic background of high deficits, soaring national debts and financial turmoil, Malta spent so much energy in the Budget debate on a controversy that centred on a pledge made by the Prime Minister before the election that his government would, if elected, cut income tax from 35 to 25 per cent for those earning less than €60,000.
The Nationalist Party held back on its pledge when the gathering clouds developed into a storm after its election, with prices of crude soaring to new highs. The situation, of course, worsened even further in the wake of the credit crunch.
But Labour would not hear of this, with the leader, Joseph Muscat, arguing that, had he been in government, he would have cut income tax and controlled expenditure.
What is the right stand to take in the circumstances developing today? There are arguments both in favour and against cutting tax to stimulate growth; one school believes a tax cut does generate growth and another argues it only helps the rich.
It is all very well to control expenditure and, most definitely, this ought to be done all the time, not just in times of financial stress but at the end of the day the government has to rely on the revenue it collects to be able to fund social welfare, essential services and capital projects.
So, in this case, the Prime Minister would seem to be on the right track when he says the pledge will only be honoured at the right time.