In the second and final article of this series I look at other fiscal challenges that Malta faces in the next decade to promote economic stability and growth after the worst recession in the last century.

The strategy adopted so far by the government to tackle excessive public expenditure has mainly consisted of eliminating subsidies, and privatising and liberalising publicly controlled entities and services that were dependent on state aid. The cost to the taxpayer for doing this has been high even if on balance many argue that it was money well spent.

The cost of running the public service remains excessively high. In some parts of this sector underemployment is endemic and contributing little to economic growth. This problem is further complicated by the fact that in other areas in the public sector, including medical care, law and order enforcement, and the protection of the environment, there are serious staff shortages.

There is little appetite for radical policies to improve productivity in certain sectors of the public service because of the political damage that such policies may bring about to those who promote them. This is not unique to Malta. In the UK the advantage that David Cameron was building in opinion polls started to evaporate when he promoted measurable public expenditure programmes to reverse the deteriorating trend in public finances.

To complicate matters, the electorate is expecting from our political leaders some pressure-easing tactics in the form of reduced taxation and enhanced public services, especially in healthcare. We prefer to prescribe pain killers rather than body building steroids to deal with our sclerotic public finances.

The challenges will be even more daunting. Baby-boomers are entering the cycle of life where they will produce less and demand more in the form of medical aid and pensions. I shudder to think how, in the absence of a clear public cost-reduction strategy, we are going to create the fiscal stability needed to promote investment and economic growth in the coming decade and beyond.

Efforts to reform the pensions system, for instance, have so far been only partially successful. Pensioners who have to survive on the current maximum state pension face real poverty. Even those retiring in 20 years face similar prospects because the only significant reform that has been implemented is the extension of the retiring age.

The current limited public services reforms are hardly enough to contribute to the sustainability of public finances. Doing little or nothing on pensions, health, education and social services reform will only help to inflate the problem.

Another fiscal challenge facing us is the need to reform our taxation system. An incisive comment made by Moody's in their most recent report on Malta has been ignored by most of the media.

"Fiscal consolidation will be challenging, since subsidies, state aid, public wages and entitlement spending are all high compared to it rating peers. The room for manoeuvre is limited, as 65 per cent of the revenue flows are cyclically sensitive, and 70 per cent of the expenditures are fixed commitments pensions, benefits, healthcare, and interest payments. Additional fiscal risks are represented by the government's renewed pledge to reduce income taxes further, to continue to provide free universal healthcare and to fund improvements in higher secondary and tertiary education."

Now is the time to start the public debate on how to address the fiscal threats that loom on the horizon. We should be aiming for a broad consensus leading to a social pact involving the unions, the political parties and business leaders.

While it is not the right time to apply the fiscal brakes even harder to rectify public finances, we should certainly discuss plans on how to tackle the conflicting challenges ahead of us: stimulating economic growth and investment while reducing public expenditure.

We risk jeopardising any future investment prospects if the long-term sustainability of our public finances is ignored and our competitiveness continues to deteriorate. While private investment is crucial to improve our productivity through modern technology and enhanced training, we also need labour-market reforms that encourage entrepreneurs to choose Malta for their future investment plans.

Ultimately, we need to work on all the factors that affect our economic competitiveness as a country if we are to fulfil our dream of a fair society where fewer people will need social assistance because the state has a sustainable social investment strategy.

jcassarwhite@yahoo.com