The pandemic has stretched the finances of almost all countries that now have to come up with tactics to promote economic growth and enhance social solidarity.
The backdrop to the 2022 budget is characterised by massive fiscal support that has helped maintain employment levels despite a substantial downturn in economic activity, especially in the tourism sector.
It was never going to be easy to present a budget with an economy still reeling from the pandemic and on the back of Malta’s greylisting.
But the budget speech presented by Finance Minister Clyde Caruana last night contains several tactical measures to get the economy back on track after 18 months of fiscal stress.
The budget is intended to incentivise people to work, whether it is the young or old, in what appears to be a concerted drive towards productivity and competitiveness. And that is a good thing.
It is welcome to see a budget making its bravest effort yet to redirect the notorious construction industry towards rehabilitating distressed buildings rather than keep incentivising the construction of blocks.
Meanwhile, Caruana has introduced measures clearly intended to bring out millions of undeclared cash in the construction sector into the open economy. And that comes with a warning – there will be no more tax amnesties from June 2022.
The finance minister also announced a series of micro-tactical measures to ease pressure on the community’s most distressed sectors, especially pensioners.
While Malta needs to now focus on the continued reform of its pension system, it is good to see the Labour government rediscovering some of its socialist soul.
There appears to be little in terms of investment in infrastructure (there was hardly a mention of the metro) but the initiatives towards the environment, which Caruana described as “the biggest ever” as well as towards the often-neglected sectors like the culture scene are encouraging.
While these measures will undoubtedly be welcome by those benefitting from them, the larger strategic economic objectives remain opaque.
The budget does not seem sufficiently embedded in the long-term strategic objectives that need to be better defined.
The most pressing challenges the country faces include the possible effects on investment resulting from the country’s greylisting, the effects of the introduction of a global minimum corporate tax, the potential elimination of the sale of passports income and the worrying overdependence of the economy on property development.
The budget did not introduce any new taxes. However, hoping that the additional expenditure can be financed by strong economic growth is a significant act of faith that might ignore the sobering economic realities.
The forecast 6.3 per cent real GDP growth is mainly based on more public and private consumption and a resurgence of tourism.
With adverse economic headwinds resulting from substantial increases in energy prices, food prices inflation, and deteriorating trading terms, the projected growth rates might not be reached as consumers begin to feel the inflation pressures in their pockets.
The measures announced in this budget will undoubtedly help keep consumers’ morale high despite persistent uncertainties about how quickly the economy can revert to pre-pandemic performance.
It will, however, not be surprising if, in the coming years, taxation will have to be raised to pay the bills of today's spending. The de-risking of the country's economic model is likely to become inevitable as some of the structural weaknesses in the economy begin to hurt.
Budgets are short-term tactical plans. They, however, need to be linked to well-defined strategic objectives that must be achieved in the longer term.
The tactics announced in the 2022 budget are the right ones. But fiscal rectitude, even if measured by new metrics, will soon have to return. What we spend today has to be repaid tomorrow.