There is a near-consensus in the literature that expenditure cuts have a smaller adverse impact on the economy than revenue increases. 11 Fiscal consolidation, moreover, produces long-term benefits since a smaller debt stock results in lower interest payments, and thus can eventually create room for growth-enhancing tax cuts. 12 General government expenditure amounted to EUR2.5 billion in 2009, or almost 44% of GDP. The largest single item was the wage bill, equivalent to 14.5% of GDP. It was followed by spending on benefits, mainly old age pensions, which amounted to some 13% of GDP. Health care, excluding wages, absorbed a further 2%. These three items together account for more than two-thirds of government spending. In contrast, an amount equal to only 2.2%  10  See European Commission, Public Finances in EMU 2010, European Economy 4/2010. 11  For example, according to the IMF, “spending-based deficit cuts, particularly those than rely on cuts to transfers, have smaller contractionary effects than tax-based adjustments”. See IMF World Economic Outlook October 2010, Chapter 3, p. 113. 12  See also European Central Bank “The effectiveness of euro area fiscal policies” Monthly Bulletin July 2010. BIS Review 156/2010  5  of GDP was dedicated to investment. A substantial increase in productive investment, particularly in physical and human capital, is clearly necessary. The Budget for 2011 recognizes this need, projecting a marked increase of 15% in capital spending. This is encouraging because in recent years growth has mainly occurred in recurrent spending.
5  European Commission, The 2009 Ageing Report: economic and budgetary projections for the EU-27 Member States (2008–2060), European Economy 2/2009, page 47. 6  Source: Eurostat. 7  Ebejer, Ivan and Ulrike Mandl, The efficiency of public expenditure in Malta, ECFIN Country Focus Volume 6, Issue 2. February 2009. 8  The tertiary educational attainment level is defined as the share of the population aged between 30–34 years who have successfully completed university or university-like education with an International Standard Classification of Education 1997 of 5–6. 2  BIS Review 156/2010  stresses, higher education drives innovation and economic transformation. 9 The University of Malta, however, is short of funds. One way of tackling this deficiency would be to limit stipend support to students who are truly in need. This would ensure that access to a university education remains open to everyone with the potential to benefit from it, while releasing funds for improving its quality. It would also address an issue of equity: since a tertiary level education is the key to better-paid jobs and higher lifetime incomes, it is appropriate that those who benefit most from it should contribute at least part of the costs involved. … while investment has not been sufficient But enhancing the supply and quality of labour is still not enough. To produce output, labour has to work with capital. Now a country’s capital stock can only grow through investment. The recent performance in this regard has been inadequate.