Constitutional ‘debt brake’ could be muzzle for Malta

For veteran economist Karmenu Farrugia, entrenching caps on public deficit and public debt in the constitution is not just a good idea but a “political must”.

“Since everywhere politics trump economics, especially when a general election is already on the horizon, it is imperative that the incumbent is restrained from vote-catching profligacy. That’s where a constitutional insertion or amendment comes to the fore,” Farrugia told MaltaToday.

Germany was the first major European country to respond to the global financial crisis by introducing a so-called ‘Debt Brake’ constitutional provision in 2009. As from 2016, the federal government will be forbidden to run a deficit of more than 0.35% of Gross Domestic Product.

Poland’s constitution, adopted in 1997, already capped the public debt at 60% of GDP while in Switzerland it was voters who introduced a debt brake provision through a referendum in 2001, where 85% of voters supported the move.

German Chancellor Angela Merkel and French President Nicolas Sarkozy now want all of the 17 countries in the eurozone to enshrine binding balanced-budget clauses into their constitutions by mid-2012. Moreover, in a bid to tranquilise eurozone markets, Spain and Italy are now rushing in this direction.

In August, Spain’s ruling Socialists and the opposition centre-right Popular Party agreed to put a constitutional limit on public debt, in an effort to contain its debt crisis.

The amendment can be waived for a broad set of reasons, including natural disasters or economic recession but both parties agree that it should send a clear signal that Spain won’t follow Greece, Ireland and neighbouring Portugal into European rescue programs.

Italian Economy Minister Giulio Tremonti also proposed to include in the Constitution a debt limit and a balanced budget requirement during his speech before the Committee Accounts of the Italian Parliament.

France is also drafting a similar constitution provision, in a move which could split the socialist opposition.

Farrugia had first called for the introduction of a similar provision in 1998, soon after the Nationalists were returned to government. “I did so in view of their excessive deficit budgeting during nine years up to 1996, which had quadrupled the national debt to almost the equivalent of 80% of our GDP”.  

According to Farrugia, the adoption of the euro as our currency imposed on the government “a welcome and much-needed discipline in our country’s economic management.

“The 2009 recession would have sent us back to the drawing board if we hadn’t been in the eurozone, where, thankfully, we didn’t misbehave”.

Politicians wary of constitutional entrenchment

Exponents from Malta’s three political parties were wary of introducing even more onerous obligations than the already rigorous mechanisms envisioned by the EU’s growth and stability pact.

Speaking to MaltaToday, Finance Minister Tonio Fenech thinks that a constitutional debt brake provision needs “in depth evaluation”.

“Such a proposal needs attentive, in-depth evaluation, and has to consider a country’s specific needs at a given time, particularly in the context of a country that still requires to invest substantially in its infrastructure, education, environment to catch up with top performers on an EU level.”

Fenech points out that most countries who have introduced this measure were “forced” to do so to give further confidence to the markets that they are committed to the austerity programme they have embarked to significantly reduce deficit and debt levels.

Fenech also pointed out that caps on both the deficit and the debt levels already exits through the Stability and Growth Pact.

The deficit cap is at less than 3% and the debt cap is 60% of GDP. These caps will be entrenched through the EU’s economic governance package, which is expected to come into force in the near future. The new package stipulates that Member States must continue reducing their deficits sustainably, even when these are below 3%.

Malta’s national debt is currently set at 68% of GDP, which is less than the EU average of 85% but higher than the level recommended by the Stability and Growth Pact.

Fenech reiterated the government’s commitment to continue reducing the deficit and debt burden. “However, when the international financial and economic crisis struck, the government prioritised jobs, and deficit targets were postponed”.

Now that Malta is recovering from the crisis, the government has put financial consolidation strongly on its agenda once again. “This is critical in ensuring stability within our economy, to attract further investment and eventually jobs”.

Labour MEP Edward Scicluna expresses his preference for “responsible economic governance by government rather than a muzzle”.

But he acknowledged how, given Malta’s recent history, a constitutional restraint “would give the taxpayer peace of mind”.

Scicluna believes that that it would have been more useful if Malta had such a mechanism in the period between 1987 to 2007, when governments systematically relied on borrowing to make up for the revenue shortfalls for its unrestrained expenditure.

“This was not the case for the period 1971 to 1986, when the debt only touched the 12% level”.

And now that Malta is in the eurozone, such a mechanism becomes increasingly more crucial. “With the revamped Stability and Growth Pact there is no way government can repeat its debt reliance as an economic strategy”. 

What is now being expected of member states is to confirm this state of affairs by some rules passed by the national parliament. 

But although the markets would welcome such a move, Scicluna also passes a word of caution.  “We have to be careful though not to put a millstone around our neck by going beyond what is being asked of us. In time of crises many indicators go haywire, and we do not want a constitutional crises on top of an economic one”.

While expressing support for measures improving “fiscal discipline and proper management of budgetary deficits and public debts” Green Party Chairperson Michael Briguglio said his party will need to analyse such a proposal in detail. However, according to Briguglio, the government should not simply rely on spending cuts to balance its deficit.

A sustainable spending programme “should also be matched with a sustainable and progressive source of government revenue.” One such source of revenue recently proposed by AD is a tax on vacant properties, albeit one which applies from the third vacant property onwards.

According to Briguglio, government’s expenditure programmes should be sustainable without losing sight of the need to reach  environmental, social and economic targets.

Reaching these targets is vital to achieve “higher educational standards, increased work opportunities including green jobs, environmental protection, more social inclusion and an increase in purchasing power.”

 A balancing act

One problem faced by Malta is that it has to fulfil its budgetary obligations while struggling to redress structural imbalances in its labour market, like that of having the lowest female participation rate in the European Union.

In order to redress these imbalances, Malta still needs to invest heavily in education and social programmes.

In this context, it remains doubtful whether Malta can achieve balanced budgets in the absence of new revenue streams or painful cuts in social expenditure, two courses of action which both major parties are unlikely to advocate on the eve of the next general election.

Still, a debt brake mechanism could be an antidote for reckless spending by government and promises of fiscal bonanza by the opposition on election eve.