Economic activity and tax revenue in Malta : analysis and projections

Abstract

One of the most important objectives of a government is the fulfilment of its social welfare function. This mainly entails the government in the provision or production of public goods and other socially justified services. The importance of such a function is that the lack of it may entail a market failure or equivalently the lack of provision from the private sector (assuming that it operates on a profit maximisation function.). Like any other enterprise however, governments need revenue to fuel this expenditure and hence the fulfilment of this objective. One of the most basic tools, and generally the most widely used is taxation. In an ideal world, revenue would suffice to sustain this expenditure. However, the state cannot readily stop the provision of such services once they are in place even though its budget is insufficient to sustain the required expenditure. Faced with this constraint the government generally opts for a second best alternative, namely the creation of a budget deficit.