This week has certainly been marked by the budget speech that Finance Minister John Dalli delivered in parliament on Monday. The day after, on Tuesday, we had the publication of the Moody's report on Malta. This report is also a significant one as it provides investors, analysts, advisers and others with the credit rating agency's assessment of the outlook for the Maltese economy.
That the presentation of the budget in parliament and the publication of the Moody's report happened one day after each other may have been sheer coincidence. They are, however, closely linked by one statement in the Moody's report.
Moody's report stated that "the challenges faced by the island are mainly of a fiscal nature: public finances have registered sizable deficits in recent years and government debt has exceeded the 60 per cent ceiling set by the Maastricht criteria".
It is important to appreciate that Moody's have circumscribed the challenges being faced by the Maltese economy around the fiscal deficit and in fact it sees what are described as promising niches for the economy. The credit rating given to Malta of A3 is based on new opportunities arising from Malta's membership of the European Union. It also spoke of the removal of doubts concerning Malta's political direction.
In a radio interview, Prime Minister Eddie Fenech Adami also emphasised that there should be no more doubts and uncertainty about Malta's direction and that the country now needs to focus more on maintaining social and economic stability. He stated that steps should be taken to obtain agreement on a new "social pact", such that all social partners, including the government, can decide together on the measures that need to be taken in the best interests of the country.
The prime minister explained that the budget was drawn up after extensive consultation such that the measures taken were meant to create a balance between the need to address the fiscal deficit and the need to maintain social cohesion.
In a nutshell it is being said that the critical economic issue that needs to be solved is the deficit in the public finances (otherwise the slowdown in the economy is being seen as nothing else but a reflection of the international economic slowdown) and that the way forward is to create a new social pact to ensure that this deficit is reduced without creating social tensions and without causing a further slowdown in the economy. This is a view of things to which I subscribe fully.
It would therefore be pertinent to ask whether the budget that was presented in parliament on Monday does measure up to this benchmark, that is whether it fits into the way forward being proposed. The performance of the economy so far this year may appear to have been not satisfactory enough. I believe that given the international scenario, the performance of the Maltese economy has been positive.
The inflation rate for the 12 months up to September this year has been 1.1 per cent and it is expected to go down to one per cent by December. This implies that inflation is very much under control and is now well below the target inflation rate of two per cent set by the European Central Bank. It is also below the inflation rates registered in the economies of our main trading partners and significantly below the inflation rates of economies competing with ours. In effect, the inflation rate in Malta is probably the lowest among the 15 EU member states and the 10 acceding countries.
The gross domestic product increased by just 0.3 per cent in real terms (that is after accounting for inflation) in the first nine months this year, but is expected to grow by 0.8 per cent by December and by 1.3 per cent in 2004. Although the slowdown has continued to bite hard into the economies of our main trading partners, thereby dampening demand for our exports of goods and services, including tourism, we maintained the same position as last year.
Unemployment is also within manageable proportions at five per cent, more so when compared to current unemployment rates in the rest of Europe, and unemployment rates in Malta, during previous years at the time when our economy had been hit by an international recession.
Given the low inflation rate, the cost of living adjustment for this year has amounted to just 75 cents. A further 75 cents shall be paid out to make good for the one-off price increases that will result from the increase in VAT. A number of measures have been taken to raise revenue. These include the increase in the VAT rate from 15 per cent to 18 per cent, with those products that are today exempt from VAT or are charged a reduced rate of five per cent, remaining as they are today. The increase in VAT is obviously going to hit more the higher spenders, therefore those with higher incomes.
Adjustments have been made to the capital gains tax that is paid on the transfer of property or the transfer of shares. Certain exemptions have been removed. Again this is not likely to impact those with lower incomes, but those with higher incomes. In effect, this is a measure that is aimed at hitting at those persons that have sought to avoid tax through loopholes in the relative legislation. In another move aimed at curbing tax avoidance, a minimum tax is being imposed on the importation of second-hand cars. There are also attempts to rationalise the use of certain welfare services, mainly in order to curb abuse.
The indication from all this is that the government has sought through this budget to increase its efficiency in collecting taxes, to tax more those persons with higher incomes, to use a stronger approach with those that seek to avoid tax, and to minimise the possibility of abuse in the take-up of welfare services. These are measures that place the budget very clearly in the wider scheme of things, of seeking to address the fiscal deficit while maintaining social cohesion.
However, we still have one issue that has remained open. Will there be a new social pact among all the social partners? Support for the pact is increasing. The government is evidently backing it. Without it the economy shall suffer as there is the risk of going back to the bad old days when parochial interests had priority over national interests. In my opinion the social pact is the way forward for our country, or else this year's budget would not have made sense.