Malta’s open economy makes it vulnerable to external factors that are largely beyond the control of local economic policymakers. The pandemic’s worst phase is probably over. But there are evolving international economic issues that call for prudent fiscal planning in the medium term so as to avoid having to make unpleasant corrections in the coming years.
The 2022 budget is rich in micro measures to support social solidarity. It is not surprising that these measures have made the better headlines for most people who, understandably, see the budget from their perspective. But, like the management of family finances, we cannot avoid the harsh reality that what we spend today can only be financed by economic growth, borrowing or increased taxation.
Finance Minister Clyde Caruana built his projections on a bedrock of optimism. He has projected real GDP growth of 6.5 per cent in 2022 to be achieved mainly from domestic demand. He also assumes that inflation will be a modest 1.7 per cent in 2022 and that employment will grow by 2.2 per cent.
These economic indicators should make Malta’s EU partners green with envy. But is it prudent to hope for the best when some storm clouds are threatening the global economy?
The IMF has just advised central banks to be “very, very, vigilant” about rising inflation and to take early steps to tighten monetary policy should price pressures prove persistent. While still not labelling the present economic phase as ‘stagflation’ – sluggish growth and high inflation – the risks are becoming more real daily. Food prices and the cost of energy are increasing at a fast rate. These will affect the pockets of families in Malta and in the source markets of our tourism industry. Consumer behaviour could change.
Meanwhile, the fiscal support given to local businesses to guarantee their liquidity during the pandemic will soon come to an end. Malta’s fiscal authorities have been among the most generous in supporting local business in the last two years. But we now need to start thinking about how the cost of this support will be repaid without kicking the can down the road, leaving future generations to solve the problem.
It is still not clear how the FATF greylisting will affect future foreign direct investment. It is unrealistic at best to assume that this reputational stain on Malta will fail to influence the perception of foreign investors when they are considering where to locate their business.
The agreement reached by the OECD to increase the minimum corporate tax rate for international companies to 15 per cent may become another factor that reduces the attractiveness of the country to foreign investors.
It would be most inappropriate to talk about introducing austerity measures when economic recovery is still feeble. But the finance minister needs to be more forthcoming in defining how the government plans to improve the country’s competitiveness in the context of adverse global developments that could affect Malta.
We commended Caruana for challenging some aspects of the country’s economic model, which is too reliant on property development. His comments on the importance of an enhanced education system were also apt. As we have emphasised in this column before, his sobering comments now need to be followed up by an action plan that goes beyond isolated short-term initiatives. These will never make a real difference in revamping the education system.
The 2022 budget was tactical. But it fell short of offering a strategic vision for a restructured economy that is highly exposed to global economic headwinds and relies ever more on sustainable competitive advantages.