subsequently falling to 9.6 per cent of GDP in 2002. In the four years to 2006, the ratio of collective
consumption expenditure hovered at around 9.8 per cent of GDP, reaching 9.7 per cent in 2006.
Developments in the ratio of collective consumption expenditure mainly reflect the Government’s
strategy with respect to employment in the public sector and the Collective Agreement for Public Service
Employees.
During the period under review, the ratio of total social transfers hovered around the 13 per cent mark,
reaching a high of 13.4 per cent in 2004 and declining slightly thereafter to 13.2 per cent in the following
two years. In this context, it is pertinent to note the concerted effort being undertaken to curb abuse of
social benefits which was intensified with the setting up of the Benefit Fraud and Investigations
Directorate within the Ministry for the Family and Social Solidarity in 2005. Meanwhile, the ratio of
subsidies to GDP reached a peak in 2003 at 2.2 per cent and then declined to 1.9 per cent in 2006.
The ratio of gross fixed capital formation to GDP stood at 4.5 per cent in 1999 and declined to a low of
3.4 per cent in 2001, thereafter increasing to 4.7 per cent in 2003, mainly reflecting a notable increase in
capital outlays on social development, particularly aimed towards the hospital project. Subsequently, the
ratio of gross fixed capital formation declined by 0.7 percentage points to 4.0 per cent in 2004, and rose
to a high of 4.8 per cent in 2005, mainly reflecting projects financed through the Fifth Italian Financial
Protocol and EU Structural Funds as well as investment related to the new hospital project. In 2006, the
ratio fell to 4.3 per cent, mainly due to a decline in investment outlays financed through the Fifth Italian
Protocol when compared to outlays registered in the previous year.
Interest expenditure, which mainly comprises of interest payments on long-term local loans fell from 3.7
per cent of GDP recorded in 1999 to 3.4 per cent of GDP in 2001, thereafter rising to 3.7 per cent in 2004
and 2005. It declined to 3.5 per cent of GDP in 2006.
4.2. Functional classification of expenditure
The following section reviews the main components of general Government expenditure by functional
classification, namely, Social Protection, General Public Service, Health, Economic Affairs and
Education, as well as Environmental Protection. Figure 2 presents the developments in the components
of General Government expenditure by functional classification for the 1999-2006 period. It is
noteworthy that Government’s policy with respect to general Government expenditure is twofold since
the achievement of fiscal consolidation does not exclude expenditure directed towards the achievement
of sustainable economic growth and employment creation.
The ratio of expenditure to GDP on General Public Service rose from 6.1 per cent in 1999 to 6.6 per cent
in the following year, hovered at around 6.3 per cent in the following three years and rose to 7.8 per cent
in 2004. Thereafter, the General Public Service expenditure ratio fell to 6.7 per cent in 2006, reflecting
Government’s efforts to restrain expenditure outlays of a recurrent nature including compensation of
employees.