It is the time when preparations for next year’s Budget intensify. The minister of finance kick-started the pre-Budget debate by expressing his views on what needs to be done in the coming year to address the country’s short-term economic and fiscal challenges.
In a meeting with the Malta Council for Economic and Social Development, Finance Minister Clyde Caruana argued that high inflation will again be inevitable in 2024. This could mean higher interest rates, dampening economic growth even if Malta is forecasting a GDP growth of 3.9 per cent for 2023 – much higher than the EU-wide rate of 0.8 per cent.
Caruana also made other significant commitments, even if his comments were somewhat cryptic, making it difficult to understand how the fiscal dynamics will evolve next year. The generous subsidy scheme for energy products and services and certain food items will be retained. However, it is unclear whether the government will follow the recommendations of the IMF to revise the scheme to ensure that waste is discouraged and the subsidies go to those who most need them.
Undoubtedly, a substantial sector of the community is struggling with high inflation, especially in food products. Assisting the working poor and those struggling financially because of poor health must remain a priority, even if it means that those who can afford to get by will get less fiscal support. This is what social solidarity should be about.
Despite significant economic growth, Malta will likely join Italy, France, Romania and Spain in recording high deficit levels in 2023 and 2024. This is mainly due to the high levels of fiscal support introduced during the COVID pandemic that has been kept in place even when the health crisis subsided. The European Commission wants member States to start slowly but surely putting their public finances back on sustainable tracks after the fiscal rules were suspended because of the pandemic.
Caruana warned that we must work to bring the deficit back below three per cent as the EU fiscal rules may become more flexible but no less demanding.
He also promised that the next Budget would be expansionary. This could mean that public and private consumption will again be encouraged. Depending on higher consumption in the context of high inflation is risky. One also needs to see whether the government’s long-term commitment not to increase taxation in the context of high fiscal deficits and rising debt will be changed.
Social partners like the Malta Employers’ Association have made several recommendations on what they want to see in the next Budget. This is understandable. Today, few doubt whether our economic model needs changing. Hopefully, in the next Budget, we will hear more details on the government’s plan to reform the labour market to reduce dependence on imported cheap labour from third countries.
In the last few years, the economy was kept sheltered from the worst effects of high inflation by generous subsidy schemes that absorbed the pandemic, geopolitical and energy market shocks. The cost of this has been fast deteriorating fiscal indicators. The time has come to plan beyond the next year’s scenario and focus on medium- and long-term economic reform strategies.
The government must talk clearly to the social partners and ordinary citizens to define what needs to be done to meet the economic and fiscal challenges of the next decade successfully.