recent performance in this regard has been inadequate. as a share of gdp, private investment amounted to 16 % on average between 2000 and 2009, among the lowest ratios in the euro area. given malta ’ s track record in attracting foreign direct investment, this shortfall is probably more a reflection of a relatively low level of domestic private investment. the latter is unlikely to be related to the cost and availability of finance. interest rates are at historic lows and, contrary to the experience elsewhere, credit to the private sector continued to expand during the recession. as for possible structural factors, the diversification of the economy away from manufacturing towards services is also unlikely to have been a factor. similar sectoral shifts elsewhere did not result in a declining investment share. rather, the relatively low level of private investment could, in part, be a legacy of the past, when firms in protected sectors could survive without the need to invest to face up to competition. in addition, in key sectors such as tourism and the wholesale and retail trades, the operating surplus has fallen, on average, over the past decade. weak profitability, which is partly due to labour costs rising faster than productivity, reduces both the incentive to invest and the internal funds available to do so. hence the emergence of a perverse cycle of weak profitability, low investment, poor productivity growth and a loss of competitive strength. these weaknesses are reflected in persistent current account … these structural weaknesses show up in a persistent deficit on the current account of the balance of payments. shortfalls have been recorded in every year but one since at least 1995. the deficit widened again in 2009 to 6. 9 % of gdp from 5. 7 % the previous year. a current account deficit indicates that we spend more than we produce. it also implies that domestic savings are insufficient to finance investment, even though, as we have seen, the rate of investment is relatively low. the only way in which current consumption levels can be sustained, therefore, is by raising incomes. this, in malta ’ s case, requires a more dynamic export performance. for a start, this means that efforts to attract foreign direct investment, much improved in recent years, need to become even more focussed and supported with a strengthened infrastructure. the domestic private sector, meanwhile, needs an incentive to switch to producing for markets abroad. this incentive is relative profit. export - oriented activity must become relatively more profitable than production for the domestic market alone. in a small island economy, where transport costs impose

the population as it ages, reducing the burden that currently falls on the unfunded pay - as you - go system. second, if individual contributions are linked more closely to individual payouts, this will encourage private saving, which, as we have seen, is necessary to close the saving / investment gap. finally, if individuals perceive a closer link between their contributions and their retirement income, this should help curb the evasion of social security payments. there is little room for tax increases fiscal consolidation, therefore, is desirable to help correct the economy ’ s external imbalance ; to put public finances on a sound footing while coping with the costs of population ageing ; and, above all, to maintain credibility and investor confidence, which are prerequisites for growing the economy. now deficit reduction is typically achieved through a combination of increased revenue and expenditure cuts. as for the former, relying mainly on higher taxation cannot be an option at this juncture ; besides, it generally distorts the efficient allocation of resources. higher indirect taxation tends to push up the price level and, hence, harms competitiveness, while higher taxes on income depress economic growth. neither, of course, is this a time for cutting taxes. an option which is at once fiscally beneficial and socially desirable is to close remaining tax loopholes and to engage in a more aggressive pursuit of tax evasion and benefit fraud. we need to cut spending, while rebalancing it the only real alternative, however, is to cut public spending. there is a near - consensus in the literature that expenditure cuts have a smaller adverse impact on the economy than revenue increases. 11 fiscal consolidation, moreover, produces long - term benefits since a smaller debt stock results in lower interest payments, and thus can eventually create room for growth - enhancing tax cuts. 12 general government expenditure amounted to eur2. 5 billion in 2009, or almost 44 % of gdp. the largest single item was the wage bill, equivalent to 14. 5 % of gdp. it was followed by spending on benefits, mainly old age pensions, which amounted to some 13 % of gdp. health care, excluding wages, absorbed a further 2 %. these three items together account for more than two - thirds of government spending. in contrast, an amount equal to only 2. 2 % see european commission, public finances in emu 2010, european economy 4 / 2010. for example, according to the imf, “ spending - based deficit cuts, particularly