For reasons already explained, progress towards the attainment of a balanced budget over the medium term must at the same time also be a priority. Financing  8  Report entitled The 2009 Ageing Report: Economic and budgetary projections for the EU27 Member States (2008-2060), published by the European Commission and the Economic Policy Committee. BIS Review 60/2009  5  the necessary investment, therefore, represents a complex task. This is because some 65% of budgetary revenues come from cyclically-sensitive sources, essentially direct and indirect taxes, and current projections show that the recovery in Malta’s export markets, and therefore also in the domestic economy, is likely to be very slow. This means that the tax base will expand only moderately. As a result, the need to allocate more public funds to investment while at the same time reducing the deficit can only be satisfied if a major effort is made on the expenditure side. Here too, however, the task is complicated. This is mainly because about 69% of total budgetary outlays are in the shape of fixed commitments such as wages and salaries, interest on the public debt and welfare payments. Since increased taxation must be ruled out as an option, the solution must be centered on efficiency improvements in the use of budgetary resources and a reordering of spending priorities. In this context it should be noted that beyond 2013 Malta is unlikely to be eligible for EU funds to the same extent as at present.
In the services sector, the importance of tourism, which rebounded in 2007 following the introduction of low-cost airlines and growth in cruise ship business, has been complemented by growth in a broad range of new activities, including financial services, aircraft maintenance and repair, online gaming, ICT, call centres and back office operations. The more diversified supply of services and the shift towards higher value-added manufacturing helped to cushion the negative impact on traditional manufacturing activities of the competitive pressures from low-cost countries. The changed structure of the economy, which is now service oriented to the extent of 77% of gross value added, led to an improvement in the balance of trade in goods and services and to gains in the terms of trade. The deficit on the former fell from more than 10% of GDP in 2000 to 3.7% of GDP in 2008, while the terms of trade went up by almost 2% during this period, driven by a strong increase in the services sector, which outweighed the steady deterioration in merchandise trade. Gains in the terms of trade can result either from higher export prices or from lower import prices, or a combination of both. Achieving favourable terms of trade is vital for an open economy where real income depends not only on the volume of output produced, but also on the value of that output in international markets. 3 Positive changes in non-cost competitiveness were complemented by a favourable trend in cost competitiveness.