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For some economists it is too early to speak of “sound finances”. Writing in the Sunday Times, economist and former finance minister Lino Spiteri did not mince his words: “Malta has a long way to go before one can seriously claim that the public finances are sound and sustainable.”
The issue of sustainability was also raised by former MCESD chairman Edward Scicluna in a MaltaToday interview, who said the EU is projecting that in 2007 Malta’s structural deficit will not be below the three per cent of GDP. “Obviously government disagrees,” Scicluna told the newspaper, “so we will have to see who is right. The examiner or the candidate.” With Gonzi’s budget taking on the semblance of a pre-electoral mini bonanza, the Lm8 million leeway for tax relief or increased spending, originally outlined in the pre-budget document, almost doubled to around Lm15 million with the various measures announced. There was no explanation as to how this increased ‘generosity’ came about, something which Prof. Edward Scicluna described as a “fiscal slippage” that would raise some eyebrows among rating agencies and the European Commission.
The question is whether public finances are in such a strong position for government to forfeit such a big tax take. The answer for Lino Spiteri is ‘no’.
“It amounts to more than we as a people can afford as yet, which is zero,” Spiteri said.
The deficit for next year will not be too different from the deficit projected for the end of 2006 by the Prime Minister. The road to the Euro has been slightly compromised, left to “luck” as Edward Scicluna would put it.
Content of depressing the deficit below the three per cent mark, even if the Commission’s way of calculating statistics may yet put into doubt government’s achievements, Gonzi decided to go astray from the convergence plan originally submitted to the EU.
The deficit next year won’t continue the significant downward spiral it has embarked upon in the last three years. It was “a calculated political decision,” according to Scicluna.
Despite the Prime Minister’s denial of an early election, he has finally given in to the pressure exerted on the Nationalist Party by its own electorate. Lm12 million may have partially satisfied the middle class but it will definitely do nothing for low-income earners who were largely forgotten in this budget. What the tax cut may have done is complicate matters for the future, especially with the decision on Euro adoption hanging ominously on Malta’s head in the first half of 2007.
For Lino Spiteri, realistic economic appraisal “is not the stuff of modern political times.”
“Crude spinning and weaving is more prevalent than in the early days of the industrial revolution,” the former finance minister wrote.
And this view is shared, albeit couched in different terminology, by fellow economist Edward Scicluna. Realistic economic appraisal would have shown that much more needs to be done to restore the country’s competitiveness, according to Scicluna.
“Our competitiveness index in the late 80s and early 90s was good. Over the last years we out-priced ourselves, living beyond our means, and what did we do? We locked our exchange rate to a relatively high fixed peg, giving us no means to adjust our exchange rate to remain competitive,” Scicluna said.
Admitting that calls for competitiveness have put pressure on workers to accept wage-cuts or freezes, the former MCESD chairman said that another way of restoring competitiveness would have been to go for a lower exchange rate when joining the ERM II mechanism.
Has the Prime Minister’s political judgement taken sway over sensible economics that would deliver the goods in the longer term? It seems so, but again Gonzi is short of time. It is probably the election that has just turned round the corner rather than the economy and for a political party the former carries more weight.
Next year will be a wait-and-see year in more ways than one, it seems.
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