This week the Minister of Finance presented in Parliament the Estimates for 2020 (otherwise known as the Budget). My intention is not to write about the Budget, but rather to write about one aspect of public expenditure – subsidies. The Budget presented this week contained a number of these subsidies, some of which have been around for a number of years.

These have included reduced stamp duty on property for first-time buyers; assistance with the financing of the initial deposit required to acquire property; a reduced rate of tax on profits derived from the assignment of rights on a promise of sale relating to immovable property; duty reductions available for second-time buyers, the purchase of vacant property in urban conversation areas and the purchase of property in Gozo; a refund scheme for property restoration; exemption from registration tax of electric and hybrid vehicles; schemes contributing towards the efficient use of energy and production of energy from renewable sources; grant on specialised equipment used by persons with disability; a grant for persons who opt to study a foreign language overseas; grants for vehicle scrappage.

Subsidies are a tool which governments have in order to support certain segments of society and to promote specific economic and social policies. They are a form of redistribution of income. Put all together these amount to tens of millions, even in a small country like Malta.

They [subsidies] are a form of redistribution of income

Something which all governments in the last three decades or so, have shied away from, has been to link subsidies, paid from taxpayers’ money, to maximum prices. For example, government gives an exemption from registration tax on electric and hybrid vehicles. However it does not impose a maximum price on such products. It allows the market to operate freely.

What is the snag here? Suppliers of such products may decide to increase the price of these products, such that they make a better profit margin. The consumer would still be benefitting from the subsidy but not to the full extent intended by the government. This would represent a form of market failure, whereby we have what economists call a “social welfare loss”.

The aim of setting a maximum price is to ensure that the consumer benefits fully from subsidies. These subsidies form part of government policy to address social justice issues, environment issues and others, in the pursuit of the common good, that is the good of society as a whole. As such we cannot have a segment of society benefitting from such subsidies, when they were not intended for them in the first place.

Someone may put forward the argument that if the maximum price is set below the market equilibrium price, it will cause a shortage as demand will be greater than supply. In Malta’s case this argument does not apply. We import most of what we consume, and given the miniscule size of our economy, supply of such products is unlimited. Additionally we need to remember that we are not referring to goods and services which fall outside the scope of the government’s social and economic policies.

We have had a similar experience already in this country in the case of property. As interest rates went down and banks extended the repayment term of house loans, housing should have become more affordable. In reality it did not become more affordable, and many are those who have not been able to get on to the property ladder. Property prices went up as a few tens of speculators made a killing, while leaving thousands of persons that much poorer.

I do appreciate that the country’s experience with maximum prices as implemented in the 1970s and first half of the 1980s did not have the desired effect. It may sound as a draconian measure. However, I strongly believe that if the government wishes to reap the maximum benefit from the application of these subsidies, it should seriously consider setting maximum prices.