Last week’s contribution focused on the issue of fiscal consolidation. For reasons related to space and to the fact that the topic has several aspects to consider, the contribution could not be comprehensive on the topic. This explains why I would like to return to the subject. I had concluded last week’s contribution on the need to have public buy-in of the tough choices that need to be made in order to achieve fiscal consolidation.
I would like to touch upon four aspects in relation to fiscal consolidation and the tough choices that need to be made.
The first is triggered by the comments of the victorious centre-right coalition of last Sunday’s elections in Germany. What struck me in those comments was an affirmation of the virtues of the social market economy that successive governments in Germany have promoted. One would normally assume that when a centre right politician speaks of fiscal consolidation, he is likely to be promoting policies that would not be very social in nature. Yet in Germany they have been able to have fiscal prudence and to incentivise work, while still having very active social policies in favour of the least advantaged.
This is a very important lesson for Malta, as fiscal consolidation in our country does not need to be achieved on the backs of the needy, while favouring the higher income earners, as has happened in other countries. This means that cuts in government expenditure and increases in revenue will need to be focused on areas that do not weaken our welfare system. Maintaining a high level of social cohesion is the key to achieving public buy-in of the tough choices that need to be made.
This brings me to the second aspect, which is the fight against tax evasion. No country can achieve fiscal consolidation if it experiences significant leakages in terms of tax evasion. Eliminating tax evasion would ensure that the tax burden is more fairly shared and would therefore enhance social cohesion and would increase the possibility of public buy-in of government’s decisions.
I have written recently about the cost of illegality in this country. I state once more that illegality, and more specifically tax evasion, sucks away resources from the public sector and forces government to make even tougher choices in order to achieve fiscal consolidation.
The third element that I would like to raise and which would most certainly involve tough choices is further reform of the public sector. We need to be bold in approach and challenge ourselves more. The government should not be afraid to privatise the provision of services, if the private sector can provide better quality and produce such services more efficiently. We need to appreciate that the task of government is to govern and not to be a producer.
We also need to appreciate that inefficiencies in the public sector leads to waste of resources that can be diverted elsewhere. Fiscal consolidation requires a lean public sector. I believe that the choice of a having a leaner public sector than we have today is less tough than having to curtail resources in heath or education.
The final element is a serious reform of Enemalta Corporation and in the way energy is produced and distributes in this country.
This corporation has to absorb so much resources from public revenues, while electricity charges remain high, that the situation is becoming unsustainable.
The magnitude of the problem is such that fiscal consolidation requires us to make the tough choice of reforming Enemalta.
Admittedly this is easier said than done and my thinking on this issue is that government should incentivise fully the exploitation of renewal sources of energy, in order to reduce the dependence of the country on Enemalta.
Whatever decisions are announced in the budget, there shall certainly be some tough choices.
Even if we do not move towards fiscal consolidation, we need to remember that we would still be making the tough choice of postponing the decisions that need to be taken to some future date. And this may not be the best option.