The ABC of the figures: the road towards the Budget 2007
by Martin Debattista

The year 2006 opened on a good note. The European Commission has assessed Malta’s new updated convergence programme covering the period between 2005 and 2008. In its report, the Commission stated that Malta seems on track to correct the excessive deficit by 2006, provided that the budget is fully implemented and the macroeconomic risks are duly addressed. The decrease in deficit is crucial for the adoption of the Euro.

In May the Governor of the Central Bank of Malta, Michael C. Bonello revealed that on the basis of 2005 data, amongst the new member states participating in ERM II, only Malta failed to satisfy the relevant criterion with a fiscal deficit to GDP ratio of 3.3%. It is expected that Malta will be within the 3% threshold needed to adopt the Euro by the end of 2006. This progress is expected to be successful, as it has been based on the restructuring of public sector entities, spending cuts and efficiency improvement, and not solely on tax measures. The government confirmed that the Euro will be adopted on January 1 2008.

However signs began to show that Malta might not keep the January 1 2008 appointment to adopt the Euro. In early September ratings agency Fitch has revised the forecasted euro adoption date from 2008 to 2009 as a result of Malta’s rising inflation rate. According to Edward Parker, head of Fitch's Emerging Europe Sovereign Group in London, Malta’s inflation must decrease “very rapidly”, if Malta wishes to meet the required criteria for joining the European Union’s common currency. In turn, in a statement a few days later, the Chamber for Small and Medium Enterprises also warned of the possibility of Malta not acceding to the euro currency by the set target date.

Prime Minister Lawrence Gonzi a few days later insisted Malta is expected to reach the financial targets required to enable the country to adopt the euro in 2008 as projected.

Pension reform remained tightly linked to financial performance. In June Parliamentary Secretary Tonio Fenech said that the pension’s reform will come into effect in January 2007 after approval in Parliament. The Malta Labour Party said reforms should not be rushed.

In July a Standard and Poor’s (S&P) report revealed that if Malta does not undergo fiscal reforms, age-related public expenditures will rise to 17.4% of GDP in 2050, up from 13.9% in 2005. As a result, “general government deficits and net debt would rise steadily to reach 12% and 188% of GDP, respectively, by 2050," said the report.

The conclusions of the report were supported by a European Commission report published in October that warned that Malta’s public finances have been found to be facing medium risks in coping with pensions in the future. This was revealed in a report on future of European Union public finances, which explores the future of pension systems. In the light of this report, the EU Monetary Affairs Commissioner Joaquin Almunia said that unless most EU member states take action in “defusing the pension time bomb”, future generations will be presented with an unsustainable financial burden.

In August the pre-budget 2007 document was launched. The document opened the budget discussions for next year with the social partners, constituted bodies and the general public. It focused on incentives to increase the economy and on measures that could be taken to decrease taxation without threatening the country’s finances.

On October 1 it was announced that this year’s budget which has been set for October 18. Prime Minister Lawrence Gonzi said it will be a responsible budget by a serious government which has stabilised the country’s finances thanks to an ever-growing economy. “Investment has increased; revenue from national insurance has gone up as more people are working and revenue from income tax has increased also even though the rates have remained unaltered,” Prime Minister Gonzi said.

A week before the budget speech, a report commissioned by GRTU revealed that Maltese economy has not registered any growth over the past ten years. The report, carried out by an economist from the Department of Banking and Finances of the University of Malta Prof. Joseph Falzon, showed that in the past five years exportation of products and services decreased both in value as well as in shares from national economy.

The latest official figures from the National Statistics Office show the general government deficit amounted to Lm16.0 million in the second quarter of 2006, registering a decrease of Lm22.7 million when compared to Lm38.7 million in the same period last year. The decline in the deficit was brought about by an increase of Lm14.7 million in the total revenue, mainly due to higher intake from VAT, coupled with a decline of Lm8.0 million in total expenditure.

In turn, the deficit for the first six months of the year amounted to Lm62.6 million, a drop of Lm32.8 million from a deficit of Lm95.3 million for the first half of 2005. This means Malta is on its pay to meet the criteria to adopt the Euro on January 1 2008.