In the election campaign of the last several months, some may have been living in a bubble that protected them from the risk of a deteriorating economic climate caused by COVID and the war in Ukraine.
When most global political leaders were preparing their people for tough economic times ahead, the main political parties in Malta kept promising to spend more in the coming years without the need for new taxation.
Reality is now catching up with us. The government is preparing people for some belt-tightening, even if this phrase is shunned in political rhetoric.
The Minister of Finance, Clyde Caruana, is drip-feeding information about the fiscal strategy that needs to be updated to address the country’s risks in the coming years. Last week, he announced a major overhaul of the current tax system that will see a new corporate tax regime in place by 2025. He declined to speculate about rates, adding “from a fiscal perspective, the government still needs revenues”.
The announcement comes at the tail end of two years in which government support to industry and households has raised the budgetary deficit to unprecedented levels. It has also increased the national debt even if it is still better than that of many other EU member states.
While avoiding the dreaded word “stagflation” that abounds in most international financial reports, Caruana admits that inflationary pressures may drive growth projections “a bit downwards”. He argues that inflationary pressures are being experienced across Europe and the rest of the world due to rising energy costs. With the growth in 2023 projected to reach 5.3 per cent, Malta’s economy should perform much better than that of most EU countries.
Still, some crucial caveats qualify these projections. The projections made by the Central Bank for their economic modelling had a cut-off date preceding the Ukraine war. The effects of the war are still evolving and no one can predict how trade, commodity prices and the labour market will be affected in the coming months and years.
Some economists argue that spiralling inflation is unlikely to be a short-term issue. The changing global trade dynamics may mean that stagflation might become an unpleasant reality for the next few years.
The short-term impact of the Ukraine war is already affecting one of Malta’s most critical economic motors – tourism. The tourism industry is most vulnerable to escalating energy and food prices. The industry has survived the demand shock caused by COVID thanks to taxpayers’ financed wage supplements and, more recently, subsidised energy and food subsidies.
It is unrealistic to assume that this support can go on for much longer without further threatening the country’s fiscal health. A rethink of fiscal priorities is overdue. In its fiscal sustainability report, the European Commission has commented that Malta is facing a “high risk” to its medium- and long-term financial sustainability.
The wage supplement scheme will end this month. The government has confirmed that cabinet has approved the prolongation of energy and food prices subsidies, even if this commitment lacks crucial details on the duration of the planned support.
While the business community and trade unions will add pressure for more taxpayers’ help to ease inflationary pressures on their members, the government needs to make social equity the bedrock of its fiscal strategy.
Across-the-board subsidies to all households and businesses may be easier to implement but will be costly and often socially inequitable. This is the time for social solidarity to ensure that the ongoing fiscal reality check does not penalise the more vulnerable.