To the extent that it is generated by an expansion in the fiscal deficit, growth is potentially reversible as fiscal deficits and growing public debt cannot be sustained indefinitely. The deficit averaged 4.5% of GDP in the first half of the 1990s, but surged to 8.4% of GDP in the second. Substantial progress to consolidate public finances has recently been made and the deficit has dropped to around 6% from a peak of 11% in 1998. While this fiscal restraint may curb demand growth in the short run, it is restoring the long-run viability of the economy that would be threatened by a growing public debt. Suffice it to say that the cost of servicing this debt has reached levels comparable to expenditures on health and education. In this context the planned use of privatization proceeds to reduce the public debt is commendable. By stimulating aggregate demand, budget deficits also encourage consumption at the expense of saving, thereby leaving fewer resources to finance investment, the only lasting source of long-term growth. Expenditure on foreign goods and services would rise, leading to a deficit on the current account of the balance of payments. The current account deficit averaged 2% of GDP in the first half of the 1990s, worsening to 8% of GDP in the second. Protracted deficits on the external current account are clearly not sustainable in view of their impact on the external reserves and the extent of foreign borrowing. In the long run, this could necessitate drastic reductions in consumption levels or curtailed investment.
These developments in the growth rate and in the twin deficits highlight the need to critically evaluate the economy’s overall performance and its prospects. The recent IMF mission has done just that and we at the Central Bank concur with its findings. The IMF team concluded that while there do not yet appear to be clear signs of a loss of competitiveness, there are warning signals. What then are we to do? What viable strategic options are available to seek to overcome the obstacles that threaten the continued enjoyment of current living standards? In difficult times such as these some might be tempted to seek shelter from external shocks by pursuing an inward-looking growth policy. Numerous experiences of countries far larger than ours have shown that this course of action only serves to promote inefficiencies that would defeat the original purpose. Malta’s own experience during the early 1980s amply confirms this fact. The fastest-growing economies have been those who faced international competition head-on and pursued outward-oriented policies designed to achieve integration into a globalizing world economy. Malta itself recently reaped the benefits of a similar approach when the removal of protective levies last year was followed by an increase in output and employment in the hitherto protected sectors. Others advocate fiscally-led growth through an expansion in expenditure or a reduction in taxes. In this context, it must be understood that government expenditure puts money in people’s pockets without necessarily expanding the economy’s supply capabilities.