The spring 2023 EU economic forecast for Malta talks of an improved outlook and persistent challenges. The present looks all so positive with a growth rate in real terms of 6.9 per cent in 2022 and of 3.9 per cent in 2023. Other EU member states wish they could have such growth rates. So it is the challenges that we need to look at and how these affect the economic outlook for our country.

The challenges mentioned in the EU document relate to high inflation, the public sector deficit, labour and skills shortages. In another document, the European Commission issued a package of recommendations which Malta should adopt. These include the phasing out of subsidies on energy prices; improving the absorptive capacity for the Recovery and Resilience Facility (RRF) grants to foster the green and digital transitions; achieving a prudent medium-term fiscal position; addressing features of our tax system; and reducing our reliance on fossil fuels.

In the spring economic forecast report, the EU also makes reference to the economy’s reliance on the importation of foreign labour, which is certainly another challenge as the policy is not a sustainable one. I would like to add the negative public sentiment against the construction sector.

In a survey conducted recently, 72 per cent of respondents stated that they are very concerned or fairly concerned about the environment and 80 per cent said they are very concerned or fairly concerned about the construction sector.

There is a great deal to say on each of these issues, which should be debated nationally in an objective manner as they do represent threats to our economy.

Last week’s contribution was about post-2023. I highlighted a number of uncertainties which present risks that we need to mitigate. The two EU documents I have referred to bring out the issues of the here and now, and they are more internal than external.

Focusing only on the subsidies on the energy prices, we need to appreciate that these subsidies have provided a very strong cushion against the impact of inflation. In spite of our energy prices being held at 2020 levels, our rate of inflation is still high. This makes it necessary to understand the source of such inflationary pressures. By this I do not mean identifying which goods and services are going up most in price. What I mean is identifying the root cause of such price increases.

I do not believe that we can sustain a rapid phasing out of the subsidies on energy prices. However, we can apply a very progressive approach.

Which inputs have gone up in price to cause the increase in the prices of goods and services? Is it transportation? Is it wages and salaries? Is it the acquisition price of assets? Is it rent? Unless we identify the root cause (and we probably all have a different opinion as to what the root cause is) of inflation, this issue will continue to plague us and will hamper economic growth.

I do not believe that we can sustain a rapid phasing out of the subsidies on energy prices. However, we can apply a very progressive approach.

Today’s technology surely allows for a thorough analysis of the market – mainly to identify high private (so not commercial) consumers. One can just remove subsidies on such high personal consumers. In addition, there can be a partial removal of subsidies for middle-tier consumers and keep the full subsidy on low consumers.

The argument in favour of such a policy is that energy consumption is more than likely to be a reflection on one’s income. Moreover, keeping such subsidies for high consumers is serving as a disincentive for them to reduce consumption and to shift to renewable energy sources.

The subsidy for businesses is more tricky. However, businesses can prove whether they have invested in energy-saving initiatives and such claims can be audited. Those businesses that have invested in energy-saving initiatives can be judged to merit subsidies, while those which have not can be judged not to merit such subsidies.

The argument in favour of such an approach is that the government has launched a number of funding schemes aimed at encouraging businesses to invest in such initiatives.

The time for difficult decisions is approaching fast and I would not like to be in the shoes of the decision-maker. The social and economic impact of the partial or complete removal of subsidies on energy prices needs to be fully evaluated. It cannot hurt more those who are more vulnerable than those who may have benefitted needlessly from such subsidies.