The government has unveiled a strategy for fiscal consolidation next year, based on curbing expenditure.
The strategy forms part of the pre-Budget document presented today by Finance Minister Tonio Fenech.
It is an update to the short and medium-term fiscal framework within the Stability Programme presented to the EU in April.
"The government’s objective in designing an appropriate fiscal consolidation strategy
is to strike the right balance between expenditure-reducing and revenue-increasing
measures. Expenditure cuts are more effective in a medium-term perspective than
revenue increases, particularly in view of the Government’s macroeconomic objective of improving national competitiveness levels," the document says.
"Furthermore, fiscal consolidation measures which cut Government expenditure tend to have fewer distortions on the workings of the economy. In line with these general principles, the Government’s fiscal consolidation strategy for 2012 is largely expenditure-based."
DEFICIT TO DROP TO 2.2%
During the next fiscal year, the general government deficit is projected to decline by
0.6 percent of GDP from 2.8% at the end of this year to 2.2%.
This will come about mostly from a decline in the expenditure-to-GDP ratio
rather than revenue-increasing measures. The ratio of total revenue to GDP is
expected to decline by 0.3 percentage points of GDP from 40.2% in 2011
to 39.9% in 2012, whereas the expenditure-to-GDP ratio is expected to decline by 0.9 percentage points of GDP to 42.1% in 2012.
Increases in the main items of tax revenue are expected to keep pace with the projected economic growth, such that the ratios of taxes on production and imports and of current taxes on income and wealth as a percentage of GDP are expected to remain relatively stable.
Marginal changes are expected in the ratios of social contributions and property income to GDP.
However, the document says, the government stands ready to act if preliminary indications suggest that revenue from taxes on production and imports in 2012 falls short of the parameters set by the historical relationship between this item of revenue and consumers’ expenditure growth.
"Meanwhile, the Government will also be actively monitoring projected developments in 2012 of direct tax revenue on the basis of the observed responsiveness of current taxes on income and wealth to economic growth.
On the expenditure side, the government will be pursuing its expenditure-based fiscal
consolidation programme by intensifying its efforts towards improved efficiency in
public spending.
Civil service recruitment will continue to be restricted but better conditions
for public sector employees are envisaged within the new collective agreement being
negotiated with trade unions.
Furthermore, to entrench further fiscal discipline within line ministries, efforts will be sustained to stick to the rigours of a revamped procedure which ties Ministries’ expenditure allocations closer to the quality of their respective plans for future years generates.
'IMPRESSIVE' EXPORT GROWTH
Mr Fenech said the Budget was being drawn up against the background of an uncertain international economic scenario, but the Maltese economy had continued to grow steadily. It grew by 3.7% last year and by 2.3% in the first quarter of this year, with the growth spread over different sectors.
The government, he noted, had taken several measures to sustain economic growth. Over the past three years Malta Enterprise approved 99 investments, including 51 new factories and 48 expansions.
The Microcredit and Microinvest schemes, launched at the last Budget, had been taken up by 67 businesses for the former and more than 600 for the latter.
Exports in the first five months of this year grew by 49%, which was 'impressive' the minister said.
"We have the fifth lowest unemployment rate in the EU at 6.2%, Spain has the highest with over 20%," the minister said.
One of the challenges of the Budget, he said, was to raise the participation of women in the labour market.
TAX CUTS
Asked about tax cuts promised at the election, the minister said the governemnt, as from the first Budget, changed the income tax bands, and came up with schemes in the light of the international financial crisis. The governemnt could not bring about income tax cuts because it needed the money to keep companies afloat.
He said one would have to 'wait and see' whether the government could give further tax cuts in the next Budget or the one after.
AIR MALTA
He said the situation at Air Malta could have an impact on the Budget this year or, most probably, next year, since the decision by the European Commission on the restructuring programme would come about Christmas time. The talks on the retirement schemes were in progress with the trade unions, and these too had to be cleared by the Commission.