At a time of global economic crisis, fiscal rectitude drops down the list of priorities of policymakers and politicians. Last year, the European Commission suspended the Stability and Growth Pact, which binds member states to strict fiscal limits of debt that must not exceed 60 per cent of GDP and a budget deficit of three per cent.
According to European Economy Commissioner Paolo Gentiloni, this suspension of fiscal rules will likely persist even into 2022.
While pre-COVID Malta had reached impressive fiscal milestones, today’s situation is fast returning to levels that up to some time ago would have been considered bordering on the unsustainable.
Finance Minister Clyde Caruana revealed that the pandemic is costing the public purse €5 million a day in increased public expenditure and lost revenue. The national debt has now reached 54.3 per cent of GDP while the deficit amounts to 10.1 per cent of GDP, the second highest figure in the European Union.
This deterioration in public finances is by no means exceptional. Pandemic debts are piling up in all European member states. According to Eurostat, all except one registered deficits higher than three per cent of GDP in 2020 and the debt ratio of countries in the eurozone will average nearly 100 per cent next year.
Most economic analysts agree with the strategy adopted by the European Commission, of spending as much as is necessary to save European economies from the risk of a prolonged depression. The bills will have to be settled later.
The strategy based on austerity in the last financial crisis of 2008 has proven to be fallacious as it has not promoted economic growth.
The tricky part of spending today and taxing tomorrow is when to reintroduce the fiscal rules based on prudence and good management of public finances.
Some analysts with their feet firmly on the ground are asking: “Who is paying for Europe’s COVID-related debt?”
Minister Caruana wants to put COVID-weary people’s minds at rest when he says: “The biggest mistake we would make is to increase taxes. Our sustainability is based on making sure our economy keeps on growing.” It is useless to lower the deficit, he argues, if the economy ends up on its knees.
Growth would be the ideal scenario but hardly the most likely one as there are still many unknown factors relating to future economic growth.
It is still uncertain, for instance, what private consumption will look like in the coming few years as some may have learnt the importance of saving more to hardwire financial security into their lifestyles. The news that both major local banks have increased their provisions for doubtful debt, due to the impact of the pandemic on business, is a sobering reality.
Public expenditure can be boosted in the short term to compensate for any fall in private consumption. Some major projects have been put on the back-burner in the last several months as public expenditure priorities have changed.
Tourism operators are hoping to see a significant rise in the number of visitors to boost demand for accommodation, catering and ancillary services.
If the much-desired high economic growth does not materialise, then an increase in taxation will become inevitable. So long as the European Central Bank keeps interest rates low and floods the financial markets with liquidity, the discussion on who pays for the debts will be muted.
The decisive factor with high debt and budget deficits will always be the growth rate. With strong growth, debt will take care of itself. If growth is sluggish, higher taxation becomes inevitable.