, supply - side economics advocates shifting the focus of taxation from income to consumption in order not to discourage work effort, saving and investment. tax systems should also be simple and transparent so as to facilitate their implementation and enhance compliance. when these norms are ignored, the end result tends to be pervasive tax avoidance or evasion, resulting in lower levels of revenue. continued fiscal deficits and increasing public debt levels are thus a symptom of inefficiency or inappropriate policy choices. this is the reason why modern market economies are advised to contain their fiscal deficits and debt within prudent levels by subjecting their policies to critical review and by raising the efficiency of public sector operations, rather than through new taxes or short - term palliatives such as one - off revenue inflows. a further reason for tackling the problem at its roots is that the inefficient use of resources in the public sector can have serious long - term repercussions. at best, these include a growth rate below the economy ’ s potential because the private sector is deprived of resources it could use more profitability ; and, because of the persistence of the deficit, the loss of fiscal policy as a counter - cyclical stabilisation mechanism. at worst, the inefficient use of resources can threaten the viability of the economy itself. many a financial crisis has been sparked off by the behaviour of profligate and inefficient governments. in today ’ s globalized financial markets, the retribution for such excesses is quick and unforgiving. implications for fiscal management it would appear that, like all human endeavours, the benevolent, interventionist role of governments was developed with the best of intentions but, as often happens, something went wrong along the way. judging by the present state of its public finances, malta is no exception. for a start, fiscal deficits have become a permanent feature of the economic landscape, which suggests that they do not reflect temporary slippages or cyclical downturns, but rather fundamental policy choices and inefficiencies. since 1990 the annual shortfall between revenue and expenditure has averaged 6 % of gdp, or lm1 out of every lm16 earned by the economy. 1 there were periods when the deficit tended to fall, but these were not sustained. this year, as explained in malta ’ s convergence programme 2004 - 2007, the general government deficit is expected to fall to just

gdp, in fact, net fdi inflows increased from 16 % to 28 % in the six years to 2006. progress has also been registered in other areas. particularly significant was the narrowing of the inequality of income distribution ratio from 4. 6 in 2000 to 4. 1 five years later, well below the euro area average of 4. 8. in education, the proportion of students having completed at least an upper secondary education increased from 41 % of the relevant age group to 50 % over the same period, and the proportion of students in tertiary education rose from 11 % to 16 %. there was also some improvement in the female participation rate, from 35 % to 38 %. new challenges lie ahead a sense of satisfaction is, therefore, justified. complacency, however, is not, for much remains to be done. and any further progress will have to be pursued in an external environment that has become even more challenging. in the first place, competition, mainly from asia, has eliminated any residual advantage in our labour intensive industries, and represents a growing threat even in more capital and knowledge intensive activities. another worrying development is the increasing prospect of a slowdown in global economic activity, reflected in the recent downward revisions to gdp growth forecasts by leading central banks and multilateral institutions. the full impact of the chain of events set off by the sub - prime mortgage crisis in the united states has yet to be felt, and risks being compounded by the mounting inflationary pressures in commodity markets, especially for oil and agricultural products, with as yet unpredictable consequences. given the circumstances, while the adoption of the euro will undoubtedly enable malta to face these challenges from a stronger position than if the convergence process had been slower, the euro alone will not be enough. against this background, i would be failing in my duty if i did not express concern at the insufficient recognition by public opinion of the risks that the evolving external scenario poses for the maltese economy and of the need to improve the country ’ s international competitiveness. the reaction to the budget for 2008 is a case in point. attention has been focussed primarily on the perceived adequacy or otherwise of the proposed increases in incomes and benefits. the media regularly carry suggestions for still more handouts and other measures that would result in even higher consumption rather than investment. in contrast, little is said about where the “ more ” would come from. neither has there been any serious discussion as to whether current levels of combined private and public consumption