In order to make up for this lost ground, the wage determination process needs to be reformed. While wage bargaining at the enterprise level provides flexibility, the automatic indexation mechanism through which current wages are adjusted to past inflation, even if partially, increases the downward rigidity of real wages and thus represents a permanent drag on Malta’s competitive position. ...and government budget deficits The current account deficit is mirrored not only in the shortfall in private savings but also in the budget deficit. Government expenditure has exceeded revenue in every year at least since 1995, resulting in a steady rise in the public debt from less than 40% of GDP in the mid-1990s to 69% today. The thrust of the recent Budget, and particularly the projected cut in the deficit ratio from 3.9% of GDP in 2010 to 2.8% next year, is therefore a welcome development. Continued vigilance is, however, necessary. Given the uncertain prospects for Malta’s export markets, for example, the assumed nominal GDP growth rate of 5.6% on which the tax revenue forecast for 2011 is based could turn out to be optimistic. The medium-term objective of a balanced budget, moreover, must be kept well in mind. EU rules stress the importance of achieving a balanced budget over the cycle precisely because fiscal prudence responds to a clear economic logic. In the long run, a persistent budget deficit contributes not only to a dangerous debt dynamic, but also to price pressures, a loss of market share and a trade imbalance.
Shortfalls have been recorded in every year but one since at least 1995. The deficit widened again in 2009 to 6.9% of GDP from 5.7% the previous year. A current account deficit indicates that we spend more than we produce. It also implies that domestic savings are insufficient to finance investment, even though, as we have seen, the rate of investment is relatively low. The only way in which current consumption levels can be sustained, therefore, is by raising incomes. This, in Malta’s case, requires a more dynamic export performance. For a start, this means that efforts to attract foreign direct investment, much improved in recent years, need to become even more focussed and supported with a strengthened infrastructure. The domestic private sector, meanwhile, needs an incentive to switch to producing for markets abroad. This incentive is relative profit. Export-oriented activity must become relatively more profitable than production for the domestic market alone. In a small island economy, where transport costs impose natural barriers to trade, it is easier to set up and defend monopolies. This was especially true before the liberalisation of product markets at the time of EU accession. But this is not to say that elements of monopoly power – and the attitudes this engenders – have not survived. For example, a survey carried out by  9  Securing a sustainable future for higher education, 12 October 2010, http:// www.independent.gov.uk/brownereport.