Time for an expenditure rule Striking the right balance between tax revenues and expenditures is the nightmare of any finance minister. As has been made clear by the economic demise of a number of countries, debt can only offer temporary respite, coming back to haunt you, if used unwisely. What seems to have been missed out in decades of policy making in Malta is the use of fiscal rules. A fiscal rule imposes a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates. Sophisticated thinkers might object that such rules act as straightjacket on policy making, and hence wrong by dogma. The more sarcastic type might reaffirm that rules are there to be broken. But if economic science has made any advance in recent years, this definitely relates to the overriding importance attached to expectations. Contrary to youngsters, surprises are not what economies wish for. Investors, are all after stability – how can you plan if the future is excessively uncertain, particularly when fiscal actions change frequently (comparable to the number of times some restaurants in Malta change their management). Apart from the budget balance requirements, which will necessarily be implemented in Malta in view of the EU’s fiscal compact, the time appears right to also consider an expenditure rule. The simplest rule could relate to an annual percentage limit on expenditure growth. This would avoid situations where temporary revenue windfalls (which could result say if oil exploration proves successful for once!) trigger higher expenditures rather than be used to reduce the outstanding stock of debt. Indeed, it is time for some rebalancing, towards a more strategic approach to public finances in Malta. Nobody questions why there are traffic rules, so nobody should be surprised that rules can be used to guide economic policy making.
Posted on: Wed, 19 Jun 2013 11:46:25 +0000
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