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Regaining Malta’s credibility

Nobody as yet knows what the final, accrued deficit figure for 2013 is expected to be. It will be a few more weeks before the Treasury and the National Statistics Office submit the public accounts to Eurostat for their scrutiny and subsequent confirmation, sometime during the third week of April.

And yet the announcement by the European Commission of its own estimate, based on a forecast that the year 2013 may end up at a figure that does not exceed the three per cent benchmark, has been received by all with great relief.

The reason is not difficult to gauge.

At about the same time that the new government’s Cabinet took the oath of office, it was faced with a long-suspected excessive deficit for the previous year (2012).

Embarrassingly, Malta was put back into the excessive deficit procedure, which it had been taken out of just a few months earlier.

On the basis of its then spring forecast, the Commission gave Malta two years to restructure its public finances.

With no policy change, the spring forecast saw Malta continuing with its excessive deficit at no less than 3.7 per cent for 2013 and 2014. An acknowledged formidable task lay ahead.

In a letter to me at the end of May, the EU Commissioner for Economic and Monetary Affairs, Olli Rehn, thanked me for “my firm commitment to bring down the deficit to below three per cent”.

For this commitment Malta was spared a Brussels package of expenditure cuts, of which Malta had had a taste a year earlier.

Instead, we agreed to achieve our structural target through “expenditure restraint and reductions in areas which would not give any unnecessary shocks to the economy”, which at the time was believed to be growing at a mere one per cent.

Come the autumn forecast of last November, the deficit was kept by the Commission at 3.4 per cent for both 2013 and 2014.

Obviously Malta had a credibility problem with the Commission, which in one official document expressed having been let down more than once by unkept Maltese government promises.

We kept checking on our figures. The government had a 2013 Budget which admittedly included the whole “inherited” expenditure programme for that year and more. All the pre-election collective agreements, excluded line items, various binding contracts and hundreds of new recruits, had to be provided for and added to the original deficit.

Furthermore, the highly optimistic revenue estimate was drastically reduced. The deficit target set at 2.7 per cent was still ambitious but we thought it achievable, obviously with the need of constant attention. With the backing of the Prime Minister and support of the whole Cabinet to take whatever action was needed to reach our deficit target, the subsequent months unfolded with feelings varying between apprehension and cautious optimism.

 

“The European Commission’s winter forecast is more than just a positive forecast because of its welcome deficit figure.”

 

On a technical level, government officials from our ministry and the Central Bank had to convince both the Commission and the European Central Bank that our results were not just credible but the model estimates and assumptions they were based on were robust.

Patience and tact paid off.

The Commission’s winter forecast is therefore more than just a positive forecast because of its welcome deficit figure. It is a vindication of a year’s government work to regain credibility with the Commission, to show that it is serious about its commitments on the policy front whether these concern its public finances or the economy.

The economic outlook’s change to stable by leading rating agencies is a further confirmation.

This was helped in no small way by the unfolding structural reforms as laid out in the 2014 pre-Budget document and subsequently in the Budget itself. The ambitious energy reform and restructuring of energy provider Enemalta; the targeted labour market measures at various levels to make work pay; the reduction of work-related tax burdens; the addressing of our educational and skills shortages; and tackling the endemic institutional problems related to bureaucracy, anaemic court procedures and, last but not least, corruption itself, happen to coincide with the Commission’s own prescription for Malta’s economic success.

The mention of a turnaround in our economic performance was met with scepticism by some. That the Commission is endorsing this economic reality is for this government a sweet endorsement. The slightly euphoric statements made by some could have been a response to the unfair and superficial comments made frequently by the Leader of the Opposition since before the election: that a Labour government cannot manage the economy. Touché.

The government cannot afford to pause, let alone sit on its laurels. Malta’s public finances have not yet been tamed, while the restructuring of certain sectors of the economy are still mammoth tasks.

The electorate has voted for an energetic team led by an energetic Prime Minister to address these tasks. It now has every reason to believe they can be accomplished.

 

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– Tuesday, 4th March, 2014


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