Christmas has certainly come early for Lawrence Gonzi. In the past, his budgets had previously one target in mind: the curtailing of the deficit to the acceptable levels which today have allowed Malta become a member of the Eurozone. While this is in itself an economic milestone for Malta and Gonzi’s stewardship of the economy, the rigid Maastricht criteria allows little elbow room for government, which will always have to strive to keep the deficit below the 3% of GDP mark. In itself, it’s enough to restrict government’s actions when it comes to increasing expenditure.
But this year’s budget is unlike previous outings. With the Eurozone test finally passed, Gonzi is looking ahead to a crucial election, and his first official one as Prime Minister and party leader. With this in mind, it was unsurprising that a political budget and a generous one at that, was in the offing. A positive, feel-good factor is essential for this government’s electoral chances – but is this budget also one that guarantees all the right ingredients for sustainability?
In this budget, Gonzi has targeted vast interest groups with a greater emphasis on putting more money into people’s pockets. With opinion polls having dictated economic decisions, income tax bands have been widened, a higher cost of living allowance granted over and above the retail price index, and a reversal of past policy on children’s allowance benefiting a greater number of families. More crucially, while the income tax bands have been relaxed, government is hoping – and this is where its gamble for the future lies – that it will increase its revenue by Lm58 million in the next year, obviously hoping the tax burden will be paid more readily, while more people join the labour market with guaranteed government benefits.
But is this gamble going to become reality? The increase in government’s projected revenue, crucial to its 2008 economic project if it wants to forge ahead with a lower deficit, depends on sustained economic growth.
And here, Lawrence Gonzi’s government and the International Monetary Fund’s projections on economic growth for Malta put forward a conundrum. While Gonzi banks on a 4% economic growth in the next year, the IMF puts this at 2.8% in real terms. Only if the prime minister’s projected level of economic growth manifests itself and income tax collection produces the much-needed revenue, can Gonzi’s gamble pay off. But with IMF projections presenting an international backdrop of decreasing growth levels, this gamble might indeed be risky.
So is the prime minister too optimistic about the way the economy will take off in the coming year? He has committed an exponential increase in government expenditure, not least with the massive outlay of children’s allowances. This in itself will be a challenge to keep deficit levels stable. EU grants will also play a crucial part in sustaining the government’s expenditure levels. But as seen from the government estimates presented on Monday, projected EU funds actually decreased in 2007. And the monies coming from Brussels are expected to be below what was estimated back in 2006.
It is of course a symptom of the arduous process in applying for EU funds. Without an efficient set-up that can take the Brussels bureaucracy head-on, applying for EU funds is a complex process that requires voluminous documentation and a lot of hours. So what happened with the EU funds projected for 2007, and why is the government not confident of getting the same level of funds next year? Whether Gonzi’s government will be able to reap the full benefits of the allocated Lm800 million in EU money is surely something to watch.
Economist Edward Scicluna pins government’s hopes on achieving satisfactory growth levels on competitiveness. This budget addresses some of these concerns but not enough, surely as the increase in the COLA has shown – it’s a measure which industry rightly bemoans. It is clear that Gonzi’s ship will have to sail in far rougher waters to take on the pressures of international competition, and the rising price of oil and food.