The outlook for 2012

Last week the Economist Intelligence Unit issued a country report about Malta. These reports are always a very interesting read, focusing as they do on the political and economic outlook of the country for the next 12 mo

We are all aware of the political uncertainty that has gripped the country in the wake of the successful resignation motions moved by the PL. In the EIU report it refers to the one that forced the hand of Carm Mifsud Bonnici - clearly the report was finalised before the RCC saga had occurred. Given the defection of Jeffrey Pullicino Orlando and Jesmond Mugliett from the ranks last week, the following statement has even more weight than the author originally realised.

"The divisions within the PN's parliamentary group have escalated to the point that the government can no longer be sure of the outcome of a parliamentary vote. This uncertainty has prevented it from undertaking much-needed reforms... Furthermore, with tensions in the PN running high and an election in the offing, the government is unlikely to implement unpopular fiscal consolidation to reverse the deterioration in the public finances so far this year."

What worries me is that we can get away with not taking our fiscal medicine this year, but only at the price of having our symptoms increase and our economic health deteriorate further. We now know that we have been in a recession for the last six months, and given the general state of the economy and the financial turbulence that we are surrounded with in the eurozone, I expect that things are going to get worse before they get any better.

So it is clear that the present uncertainty is not just an inconvenience for the PN - it is also a major problem for the country, since problems are being swept under the carpet in order to avoid further controversy. There is no doubt that avoiding these issues will not make them go away, and that the longer it takes to address them, the harder it will be to resolve the situation.

The Economist Intelligence Unit tells us that it is "unlikely that the deficit will remain below 3% of GDP in 2012. Our forecast is for the deficit to widen to 3.8% of GDP, narrowing slightly to 3.5% in 2013 as a gradual recovery in economic activity supports tax revenue. Public debt (under Eurostat's preferred definition) is forecast to rise to 75-80% of GDP until the end of the outlook period. If government-guaranteed debt is included, the ratio rises to almost 100%".

There is no doubt that our small country is exposed to the problems engulfing our neighbouring countries. The financial difficulties experienced by potential tourists, for example, are bound to affect us. As people feel the pinch they tend to book less holidays, and when they do go on holiday, they are more careful with their cash. Similarly, a decrease in consumer demand throughout the European Union will impact our manufacturing industry and reduce exports.

"Signs of a slowdown in the tourism sector were already in evidence during the second half of 2011 as economic conditions in Malta's main trading partners deteriorated. However, in the first quarter of 2012 the number of tourist arrivals declined by almost 11% over the comparable quarter of the previous year. The decline was also reflected in the number of days stayed, which fell by 8%, while spending by tourists also declined, albeit at a more contained rate of 2.6%."

If the PN plans to delay the election to 2013, it will want to present an attractive budget come next October. There is no doubt that no major cuts in expenditure will be made a few months before we go to the polls, which raises the question as to how the government will attempt to balance the books.

Whichever party is elected will then get to face the music, possibly having to cut spending aggressively. I envisage that popular schemes such as the children's allowance for all and sundry (whatever their family income) will be the first to go. We will also see the phasing out of other schemes, such as the fruit and veg portions given to children in schools, the subsidies on the purchase of photovoltaic and solar heating equipment and tax refunds on independent school fees and purchase of musical equipment.

These are a few of the cuts that spring immediately to mind - but I very much doubt whether they will be sufficient to stem the tide. It is likely that a lot more will have to go.

It would indeed be nice to see our politicians worrying about this situation once in a while, instead of getting caught up in endless ego trips and personal vendettas.