Last week the European Commission issued a warning to Malta regarding the public sector finances. In effect it called on the governments of six of the new EU member states to present proposals on how to achieve a reduction in the public sector deficit in their respective countries to sustainable levels.
An element of convergence of the level of the public sector deficit in each of these countries to a level of around three per cent is expected in order to facilitate their entry into the so-called euro zone.
Membership of the euro requires a budget deficit of around three per cent as stipulated in the Stability and Growth Pact that paved the way to the creation of the euro.
Malta has presented the EU Commission with its own proposals on how it seeks to achieve this convergence during the three-year period 2004-2007 and the Council of the EU's finance ministers is expected to adopt an opinion on these proposals and to recommend further measures.
Malta's position is based primarily on achieving a higher growth rate of the gross domestic product than at present, namely a growth rate of 2.1 per cent instead of the current 1.1 per cent.
A rationalisation and control of spending complemented with a drive to reduce tax evasion and to improve tax administration coupled with this higher economic growth rate should eventually bring the budget deficit to around 1.4 per cent by 2007.
A result like this would be a very big achievement in this country, where we have experienced unsustainable budget deficits since 1996, when it went over the Lm100 million mark for the first time from a modest level of Lm44 million in 1995. It hit a peak of Lm140 million in 1998, started going down to more manageable levels as it hovered around the Lm85 million mark, for it to go up again to around Lm100 million in 2001 and then to well over Lm100 million in 2003.
A further addition to government debt was made with the assumption of debts previously belonging to Malta Drydocks and Malta Shipbuilding.
Following this assumption of debt, the public sector deficit as a percentage of the gross domestic product stood at 9.7 per cent.
How realistic are the government's proposals to the European Commission? It is a known fact that the level of deficit of 9.7 per cent of the GDP is the consequence of a one-off operation that resulted in an increase of 3.2 per cent. Thus the non-recurrence of this event should in any case put the level of deficit to 6.5 per cent of GDP.
It is equally a known fact that one of the reasons why the deficit as a percentage of GDP remained high and unsustainable was the slowdown in the economy as a result of the international economic slowdown.
Thus, it is not unrealistic for the government to assume that it could manage to bring down the deficit as a percentage of GDP because of a higher growth rate. Moreover, a growth rate of 2.1 per cent (the rate projected by the government to the EU) is a fairly modest one by Maltese standards, when it is not shackled by an international economic slowdown.
Another element in the equation is government expenditure.
The latest data on public sector finances relate to the first five months of this year.
The indications so far are positive but need to be sustained. There is a noticeable slowdown in the increase in expenditure. The increase in 2002 over the corresponding period the previous year was of Lm30 million and in 2003 of Lm26 million. The increase this year is only of Lm3 million.
So far, total expenditure represents 39 per cent of the budget estimate for the whole of the year, with 41.7 per cent of the year gone. Total expenditure in the first five months of 2003 was 43 per cent of the eventual total final expenditure for the year.
The final element is recurrent revenue. Even here we note a reversal of last year's trends. Recurrent revenue for the first five months of last year was down when compared to the same period in 2002.
The increase in 2002 over 2001 was also fairly modest.
Government revenue is highly dependent on the performance of the economy, so this trend was clearly the effect of the economic slowdown.
In the first five months of this year recurrent revenue increased by Lm22 million. Altogether the structural deficit for the first five months of this year was of Lm86 million compared to the Lm105 million for the same period last year.
It therefore appears that the targets set by the government to bring the fiscal deficit down to sustainable levels are realistic and achievable.
We might think that the EU is being intrusive in expecting the government to cut down the fiscal deficit.
However, this is an issue that has been considered as one of the major problems facing this country for the last six years.
The fiscal discipline that is being expected of us by the EU is not an intrusion but in effect an encouragement to address the issue. Addressing the issue in an effective manner would in the long run be of benefit to us.
This is why we should make every effort to achieve the targets set by the government in addressing the fiscal deficit issue by 2007.