Walking the fiscal tightrope

The optimistic mood with which the world started this year is slowly evaporating. Once again the business media is talking about the major risks that still face the economies of developed countries.

Economists, who are wrongly considered by some as the high priests who can point to us the best way for economic salvation, are apparently not agreeing on what needs to be done to restore growth. In the UK 20 renowned economists are pressing for immediate fiscal tightening to sanitise public finances. But 60 other even more renowned economists claim that it would be dangerous to promote fiscal rectitude at this stage when growth prospects are still weak. So who are we to believe?

The reality is that the differences of opinion among economists on when fiscal tightening should start are far less important than the broad agreement there is on other major issues connected with the fiscal management in developed economies in the next decade.

Waiting for the recession to fizzle out or resorting to mere tactical fixes will not help us overcome the major obstacles ahead. We need to engage seriously on the best way to walk the fiscal tightrope to promote economic growth while slashing the deficit and the public debt.

We need to look beyond the short-term and start spelling out clearly defined plans on how we are going to put our public finances in order. When the going was good we sowed the seeds of today's problems by loosening fiscal and monetary policy, for instance by increasing wages in the public sector well above any productivity gains. The cost of liberalising and privatising certain economic sectors was also very high for taxpayers.

Long-term fiscal sustainability goes beyond short-term measures to reduce the deficit below the magic three per cent. One of the toughest challenges that we have to face in the next decade is the promotion of economic growth at a time when pressure is increasing on the government to reduce public borrowing to come in line with the Stability and Growth Pact criteria. Luckily Malta is neither Spain nor Greece, but we still have several warts in our public finances that must be eliminated if we are to attract investors to our shores.

To complicate matters, the economic recovery in Britain and the eurozone area is less encouraging than we were led to believe at the end of 2009. This is bad news because it is likely to delay the surge of foreign demand for our goods and services that is so important for our economic growth. Even if growth accelerates in Europe later this year, it is unlikely that it will bring about any significant job creation. A jobless recovery in Europe is hardly good news to us.

As long as this phenomenon persists, it is unlikely that we will see any significant interest in private investment in our economy. If one adds to this the restrictions placed on our government to borrow more money to promote public productive investment, the prospects of acceptable growth become that much more elusive.

As optimism for a V-shaped recovery is quickly vanishing, we need some contingency plans to address the possible risk of a double-dip recession. Such a plan should ensure that any public capital investment proposed must be the most effective in stimulating economic growth.

Giving a much needed facelift to those parts of the island that are crucial for promoting our tourist product would certainly win my support. The upgrading of our road network, the electricity, water and drainage systems, and effective environmental management programmes are other projects that need to be financed mainly by public funds to stimulate economic growth.

The recent update on Malta by the European Commission commented that "the budget lacks a clear medium-term focus in the sense that the multi-annual projections presented in the annual budget are not underpinned by an articulated medium-term strategy, nor by an indication of the broad measures to achieve them".

Now is the time to start defining how we plan to walk the fiscal tightrope in order to promote growth and at the same time heal our public finances.

jcassarwhite@yahoo.com