For a start, each year’s deficit translates into higher debt and debt-servicing burdens, which already stand at 67 per cent and 3.4 per cent of GDP, respectively. 5 Put differently, the 196 million euro in interest due on the debt next year is equivalent to what the Government would spend on medicines  2  Structural Issues Report 2010, which focuses on the impact of the energy markets on the macroeconomy. A detailed report is to be published next year in the form of an ECB Occasional Paper. 3  Weathering the challenges, in Ernst & Young’s 2009 Malta Attractiveness Survey. 4  Paul Krugman, The Age of Diminished Expectations: US Economic Policy in the 1980s, MIT Press, 1992  5  Estimates taken from the Budget speech 2010. 4  BIS Review 154/2009  in three years at today’s prices. To complete this perspective, despite the reduction planned from 2011, the general government deficit in that year is still expected to remain just above the 3 per cent benchmark, and the forecast reduction to 2.9 per cent in 2012 is contingent on seemingly optimistic nominal growth assumptions. What are the options for reducing the deficit? Since any increase in the tax burden, already high at around 40 per cent of GDP, would have a negative impact on competitiveness, expenditure restraint seems to be the only possibility. This option is more complex than it might seem, however, because of the structure of recurrent government spending.
6 The projected reduction in the workingage population will translate into slower economic growth and will, therefore, negatively impact tax revenues, at the same time as the fiscal burden of a larger population of elderly people increases. The Commission calculates that by 2015 the share of age-related spending in GDP is expected to reach 20.1 per cent, two percentage points up from 2007, mainly due to the increased cost of pensions and healthcare, and will continue to rise thereafter. The fiscal correction required to bridge the implied sustainability gap clearly cannot be achieved without a culture change regarding the welfare state. Put simply, it needs to be understood that you cannot give away what you do not have. We must, therefore, adopt a more cost-efficient approach to the provision of public goods and services, whereby only those demonstrably in need would benefit. Access to social benefits, healthcare and subsidies should be streamlined through a combination of means testing and market-based mechanisms. In addition, the benefits structure could be further refined beyond the recent Budget measures with a view to making work pay and reducing the disincentives to enter the labour market. Conclusion The Maltese economy is experiencing its first major test since it adopted the euro. While membership of the euro area has provided a degree of protection during the crisis, in particular exchange rate stability, the road ahead is still fraught with challenges.