6 - 12 April 2000

Governor urges more understanding over public debt

by Anthony Manduca

The government's commitment to rein in the budget deficit and to stabilise the public debt is a positive development and must be pursued as a national goal, according to a statement by the Governor of the Central Bank of Malta, Michael Bonello, in the 1999 Central Bank of Malta annual report. However, Mr Bonello points out that the implications of a public debt whose

servicing absorbs one in every eight liri of tax revenues, exceeds recurrent expenditure on health and is one-and-a-half times as large as expenditure on education, needs to be more widely understood. The same applies, Mr Bonello said, to the fact that social welfare benefits as well as wages and salaries of government employees each absorb almost one half of tax revenue.

The Governor said that this year's 7.1 per cent GDP target for the budget deficit is within reach, "but reducing it further to sustainable levels by 2004 will call for a determined effort to increase revenues and reduce expenditures: the former preferably through efficiency gains in tax collection rather than higher tax burdens, which could discourage new economic activity; the latter through further pruning of the public sector, the reduction of waste and abuse as well as reform in the realm of social welfare benefits, including pensions and the privatisation of activities that can be undertaken more efficiently by the private sector".

Mr Bonello said that fiscal and monetary policies in 1999 were consistently aimed at preserving macroeconomic balance and stability. He said that these are necessary, but not sufficient conditions for achieving higher, sustainable rates of growth. He said: "In a small, open economy which is lacking in natural resources, another important condition is the attraction of investment in higher value-added activities, both in manufacturing and in services. Such investment will only materialise if capital is assured of earning a reasonable return in a stable, legal, social and economic environment.

"The structural reforms currently being undertaken in both the product and the labour markets should contribute to achieving this objective. Meanwhile, there are already a number of investment projects in the pipeline, most of them in the private sector, which are expected to generate additional economic activity this year."

In his statement the Governor said that the period during the EU negotiating process should see the economy undergo structural and institutional changes which will ultimately create new investment and export possibilities through further integration "with the world's largest economic grouping". Mr Bonello said that the growth prospects for the Maltese economy in 2000 will be strongly influenced by the pace of the restructuring process in both the private and public sectors and by the timing of the implementation of the new investment projects.

"On current indications, the growth rate is expected to remain roughly at 1999 levels. If the investment projects come on stream earlier than expected, then a GDP growth rate in excess of three per cent is possible. More importantly, however, this year should mark a period of rationalisation and consolidation for the Maltese economy aimed at placing the country on a sound competitive footing, able to integrate successfully with its main trading partners," Mr Bonello said.

The Governor warned that there should be no illusions about the complexity of the task ahead. He said that reform cannot be further postponed if the country is to keep pace with its many existing and prospective competitors "and to be able, therefore, to fulfil its people's expectations of higher living standards". He said that comfort could be derived from the experience of other countries which shows that it is possible for the costs of reform "to be minimised and shared by all the social partners through the creation of a 'virtuous circle' of policy complementaries".

Mr Bonello said that such synergies have recently been achieved in some European countries. "The process started with a reform of the social benefits system. This helped restrain public spending and thus reduced the budget deficit and also allowed for some lightening of the tax burden. In addition, cutting taxes and reforming benefits served to foster and sustain a policy of wage moderation. And wage moderation, combined with a reduction in the real minimum wage for first-time entrants to the labour market, in turn helped to strengthen the demand for labour overtime. Finally as employment started to grow, the tax base increased and tax rates could be lowered further," he said.

The Governor said that it should not be beyond our country's ability to similarly spur job creation and growth. He said that with the necessary macroeconomic policies now in place, the task remains to underpin these policies with appropriate structural reforms and to secure broad support to sustain them.