There are a few different ways to evaluate the success of government subsidies. Most economists consider a subsidy to be a success when it addresses market failures and externalities to achieve greater economic efficiency. Subsidies also help to overcome extraordinary adverse events like natural disasters and pandemics.

Politicians also consider it a success if a subsidy helps them achieve an objective of a more political nature – that of “bringing home the bacon” by securing support from special interests. But even if they achieve short-term political goals, subsidies are prone to long-term failure in the economic sense.

According to a Central Bank of Malta analysis, spending on subsidies is expected to remain significantly above pre-COVID levels at least up to 2025. Between 2000 and 2019, subsidies amounted to 3.2 per cent of total government spending or roughly 1.3 per cent of GDP. In 2022, subsidies amounted to a whopping five per cent of GDP.

The economy experienced extraordinary adverse headwinds in the last three years, including COVID, the Ukraine war, high global inflation and the more local, never-ending restructuring saga that the national airline Air Malta has become. The government reacted to the external challenges through the introduction of schemes such as the wage supplement, vouchers for households, subsidised interest payments, a price freeze on energy products and services, and generous guarantee schemes to cover bank lending to enterprises.

While the extent of these subsidies is expected to be curtailed, it is worrying that the central bank predicts they will remain higher than pre-COVID levels. Policymakers must not overlook the risks of subsidy schemes being kept in place longer than necessary.

Some political theorists argue that some subsidies can lead to regulatory capture and rent seeking. No one benefits when regulatory agencies come to be dominated by the industries or interests they are charged to regulate. Similarly, when entities seek to gain added wealth without reciprocal contribution to productivity, society and the economy suffer.

Some companies turn to the government to shield themselves from the competition and the realities that make their business models unsustainable.

The IMF and the European Commission have advised the government to revise the energy subsidy schemes, especially now that energy markets are trading at levels well below those seen during the pandemic. This advice makes good fiscal management sense and protects the environment from pollution when the cost of fossil energy does not reflect market conditions. But the government will still not commit to winding down these subsidy schemes.

Too much public spending also encourages a dependency on the government that undermines risk-taking and entrepreneurship. An unrealistic commitment not to increase taxation for an undetermined time encourages dependence on subsidy schemes when adverse economic conditions prevail. The generous financial guarantee schemes offered to small businesses during COVID have undoubtedly helped many survive.

But now is the time to ensure that only viable enterprises continue to operate without taxpayers’ support.

The dangers of too much government spending through indiscriminate subsidy schemes are being ignored. For too long, the government has been patching up the consequences of its procrastination on economic restructuring by adopting the politics of subsidies. These, however, only hide the sore wounds of an unsustainable business model.

This will inevitably lead to falling investment in essential public services like health and education. We can no longer shield ourselves from harsh economic realities by administering painkillers in the form of indiscriminate subsidies financed by more public borrowing.