The government has adopted a wait-and-see approach on the promised income tax cuts because its main target for the next Budget is fiscal consolidation and driving down the deficit.
The target is to reduce the deficit by six percentage points, from 2.8 per cent this year to 2.2 per cent next year, with the ultimate aim being to achieve a balanced budget.
“It would be a mistake if we took our sights off this target. But the 2.2 per cent target is equally ambitious,” Finance Minister Tonio Fenech said as he launched the Budget 2012 consultation document aimed at stirring a discussion on possible budgetary measures.
Mr Fenech did not rule out the possibility of delivering on the income tax cuts promised before the last general election but was noncommittal, insisting instead that any decision had to be taken in the light of what the country could afford at the time.
He rebutted an argument that the government had not lived up to its electoral promise, noting how in the first Budget following the 2008 election, the government had modified income tax bands.
“We have to design the Budget on the principle of sustainability. If not, the chickens will come home to roost,” he said, constantly underlining the importance of fiscal consolidation.
“We need to keep our feet on the ground in the context of the reality around us. Faced with positive indicators, it is easy to think that the storm has passed and that the government can now be open handed in its benevolence,” he said.
Mr Fenech said the Budget was being drawn up against the background of an uncertain international economic scenario but the Maltese economy had continued to grow steadily. It grew by 3.7 per cent last year and by 2.3 per cent in the first quarter of this year, with the growth spread over different sectors.
The government, he noted, had taken several measures to sustain economic growth. Over the past three years Malta Enterprise had approved 99 investments, including 51 new factories and 48 expansions.
The MicroCredit and MicroInvest schemes, launched at the last Budget, had been taken up by 67 businesses for the former and more than 600 for the latter.
Exports in the first five months of this year grew by 49 per cent, which was “impressive”.
Malta has the fifth lowest unemployment rate in the EU at 6.2 per cent, he said proudly, noting that Spain had the highest rate with over 20 per cent. This was why the creation of jobs was going to remain an important aspect of Budget 2012.
“If we do not send out this message on the international front, we can easily lose all we have gained so far. If markets, investors and credit rating agencies begin to perceive that Malta is a country with problems instead of being a country that is addressing its challenges, investment will not come here,” he warned.
He said the key areas on which the Budget intended to focus included consolidating the successes of the financial services industry, sustaining the tourism industry, investing in research and development, education and innovation, incentivising business industries and the promotion of Gozo as an ecological island.
Asked how the situation at the ailing national airline, Air Malta, will impact the Budget, Mr Fenech said it could have an impact this year or, most probably, next year, since initial indications showed the European Commission decision on the restructuring programme would come around Christmastime.
The talks on the retirement schemes were in progress with the trade unions, and these too had to be cleared by the Commission, he said.