After the dust has settled on the budget, it might be opportune to ponder on some reflections on the state of the budgetary and general economic debate in Malta.
Unfortunately, the budgetary debate remains dominated by headline figures such as the COLA increase or the deficit or debt ratios. This country and our collective future deserve much more than this especially given the significance of the budget when seen as an economic tool to steer the future direction of the economy. It is high time that our country elevates the level of debate surrounding the budget and other important policy debates.
A lot of the discussion has featured on the headline figures of debt and deficit. The fiscal situation is important. However, there are other more important aspects to focus on. Earlier last week, Mario Draghi, Italy’s prime minister and one would say, Europe’s political leader who has succeeded Angela Merkel in this unofficial role, unveiled an ambitious Italian budget for 2022-2024, with deficits above the limits set by the Stability and Growth Pact, in what appears to be a bet on a change in the EU’s fiscal rulebook.
Draghi presented an expansionary budget with tax cuts, increases in retirement age and other incentives aimed to stimulate consumption and investment. The main assumption is based on an aggressive growth rate that exceeds six per cent. This strong growth should also lead to a slight reduction of Italy’s debt to GDP ratio, which Draghi said was a sign that economic growth is the most effective way to reduce public debt.
From his public statements, it is evident that Draghi wants Italy to grow out of the country’s debt which is expected to hover around 150 per cent of GDP in 2022, clearly above the 60 per cent EU target. Signalling that he expects a change of the EU rules, Draghi described them as “unrealistic” at the budget press conference earlier last week.
In early 2020, the European Commission carried out a review of the rules in the Stability and Growth Pact with a view to reforming them, though that process was then suspended during the pandemic. Earlier this year, Economy
Commissioner Paolo Gentiloni and Commission vice-president Valdis Dombrovskis announced their intention to take up this process again, stating the need to allow for more growth-enhancing investments in the EU framework and make it more counter-cyclical.
This should be the nature of Malta’s economic and budgetary debate. It is high time that the COLA mechanism and the new mechanism that the government has announced should not be announced during the budget but should be seen as ad hoc process which is both technical and evidence-based. This will remove the spotlight on a single number which derails the nature of what the budgetary debate should focus upon.
Additionally, we believe that the government should start presenting longer-term budgeting such as a two- to three-year horizon like Italy and the UK presented. This allows an annual budget to be seen within a broader time horizon and part of a multi-annual plan that seeks to truly direct and steer the economy.
As a small and open island, the economy will continue facing key challenges over time- Stephanie and JP Fabri
Another area that the budgetary process needs to embrace more fully is the concept of impact assessments and performance-budgeting. Performance-based budgeting aims to achieve more effective and efficient implementation of public functions, higher quality of public services, reduction of general government expenditure and staff costs, and more flexible and less bureaucratic management of the government sector.
More effective governance requires the ability to use the available resources as optimally as possible, which often means the implementation of strategic goals beyond the boundaries of ministries and organisations. This will support the discussion on public expenditure, its efficiency and effectiveness. Countries such as Estonia have started implementing performance or activity-based budgeting.
As a small and open island, the economy will continue facing key challenges over time and needs to build its own resilience to inherent vulnerabilities that can be exacerbated by external occurrences. The 2008 financial crisis and the COVID-19 pandemic should remain as stark reminders.
It is, therefore, even more critical for our country to pursue and engage in economic debate that is evidence-based and beneficial to the country in the long term. Social partners have a key role in this together with political parties. The budgetary debate should be more about substance and less about politics.
Stephanie Fabri and JP Fabri are economists.