The balance between exports and imports of goods and services has been consistently negative over the past decade, averaging 8% of GDP. While in past these deficits have been made good through inflows of capital from abroad, there is no guarantee that external imbalances on this scale can persist without posing a serious threat to the country’s external reserves and, ultimately, to the Maltese lira. And may I at this point remind you that the low and predictable inflation we have experienced in recent years is largely attributable to the pegged exchange rate regime. This has also significantly reduced pricing risks for exporters and investors. It should, therefore, be clear that undue and sustained pressure on the reserves would evoke a monetary policy response which would have pervasive repercussions. There is no doubt that a primary factor behind these macroeconomic imbalances is the state of public finances. Malta’s fiscal performance over the past decade has not been rigorously consistent with its intended objectives. Fiscal consolidation efforts based mainly on increasing taxation brought the deficit down from around 11% of GDP in 1998 to between 6% and 7% of GDP in the past three years. It is, however, clear that further attempts at consolidation, particularly in a weak growth environment, will have to focus on expenditure cutting. The Irish experience during the 1980s is most telling. The first half of the decade was characterised by increasing taxation, which often had to be followed by higher expenditure to satisfy economic, political and social demands.

This method places a strong emphasis on social acceptability coupled with supply-side reforms designed to ensure that the pension system is sustainable. A society like ours that is devoting more resources to welfare payments than it can afford, is saving and investing too little and is spending more than it is earning - while financing these excesses with borrowed money - stands in blatant contradiction with its professed commitment to social justice, because it is bequeathing to its children an inheritance of debt in selfish rejection of the principle of inter-generational equity. This prospect is clearly unacceptable. It is time for all to recognise this and to shoulder what has become a moral responsibility. BIS Review 50/2003  3  Environmental Degradation It is in a similar spirit that I approach another important challenge, namely that of environmental degradation. There is no question that a significant part of our economic achievements in recent years have been attained at the cost of the environment. It is doubtful whether this constitutes real progress, as it is eroding the welfare of current and future generations and depleting the productive potential of an economy that is highly dependent on quality tourism. From a more practical economic viewpoint, environmental sustainability, involving the conservation of existing amenities and resources for an indefinite time period, will entail significant resource outlays. This is in addition to the resources necessary to finance the investment needed to face the competitive pressures of globalisation and to meet the costs of population ageing.