The Finance Minister has drawn up the Budget to be delivered tomorrow against a very tough background, and against a problem of his own aggravating. Recession is not merely a threat. It is happening in our main markets. It is already infiltrating our economy, and will soon cause bigger problems. Open economies like ours - heavily dependent on foreign trade in products and services - have no protection against international developments.

On top of that, construction - a mainstay of our economy - is contracting. Small builders tell me that, whereas they used to get two or three firm enquiries a week, they now barely get two a month. A related sign came from an excellent tile layer I know. He used to be fully booked for some 18 months in advance. Now you can get him to commit to start in six weeks' time. On top of that, debtors - including leading companies - have become more reluctant to come up with payments due or well over due.

Mine may not be a wide enough universe to draw definite conclusions from. But domestic economic ill wind usually starts at that level. Negatives are also developing in the manufacturing sector. Though unions and employers are cooperating more closely than ever before, some of our industries are already being heavily buffeted, laying off workers or reducing the working week. That is just the start.

With a roaring economic giant like China facing a sharp drop in its amazing growth rate, there is no way that countries elsewhere will escape the effects of the global downturn. China offers a further striking example of how economic activity is changing. A haven for so much investment in search of competitive prices, it is losing competitiveness, fast, including in basic sectors like apparel production.

The Prime Minister and Co. have now dropped the happy-happy talk that preceded the general election. They have been taking turns to remind all and sundry that the Budget for 2009 will have to take into account weakening in our main markets.

Incipient weakening was evident even before the election was held. It has now accelerated, making the Finance Minister delay his final conclusions. What it has not made the Cabinet do is take a fresh look at the way they are trying to rein in the galloping budget deficit. For months it has been apparent that the government would fail to meet its deficit target for 2008. The administration preferred to live in denial, claiming that heavy social security payments were made early in the year, and that revenue tends to pick up in the fourth quarter. Correct on both counts.

Nevertheless there were other things in play which the government was late in externalising. Now we know that the subsidies to Enemalta were much higher than projected when the 2008 Budget was presented.

On the eve of concluding his first Budget as a full minister, Tonio Fenech came out very strongly to remind us that subsidies to Enemalta are running at an unsustainable €7million a month. That is why he and Austin Gatt insisted and eventually announced that an increased tariff structure for water and electricity consumption must come in retroactive force with effect from October 1.

We have not been told the full story of how the deficit is building. The Finance Minister has yet to say how much the botched preparations to privatise the shipyard, by first denuding it of its workforce, will cost in terminal payoffs and early retirement pensions. Against this negative background and the mounting effects of the global recession, it is remarkable that the government decided to take so much more money out of the economy through vastly increased water and electricity tariffs.

It is inevitable that a time will come when a full cost recovery mechanism will have to be worked out for utility supplies, adjusted for social impact and for the effects of market failure. Yet it beggars belief that the government is doing this now and racing into 2009, even as global recession wreaks havoc.

The palliative offered to high consumers of water and electricity will still leave them with high new costs, while the cost of the phasing-in and the higher tariffs will have to be borne by small businesses, private households and the taxpayer. The economic impact is not being softened. It is, in fact, being made harder. Smaller businesses and households tend to spend more of their marginal income than big businesses. Reduced marginal income will translate into reduced spending, aggravating the slowdown.

The government is trying to justify itself by saying that subsidies are bad, and that if it does not save on subsidy outlays by allowing Enemalta and the Water and Services Corporation to switch to full cost recovery tariffs, the required subsidies will have to come out of taxation.

In saying this, the government is forgetting three things.

First, it is its fault that utility tariffs were kept too low over the years. Second, subsidies, including distorting cross subsidies, were its creation, no one else's. And finally, there need not be increased taxation to make up for subsidies which would have had to be given to the two corporations if tariffs had not been raised for one or two years. The government could cover the gap (reduced through the falling price of crude oil and its by-products) with additional borrowing by Enemalta and the WSC, rather than by raising taxes.

With the tide of recession rushing in the government is mad to take more money out of the economy now. Economic sense demands that it counters that with reduced taxation in tomorrow's Budget. If not, this week's ill-timed measures could be aggravated by further madness.