Editorial | The last Budget

With an election, due at the very latest by September next year, the budget Clyde Caruana will deliver on 11 October will be this administration’s last.

The Finance Minister faces the daunting task of balancing the need to provide a fiscal stimulus to boost economic recovery in a post-COVID scenario and resisting the election urge to splurge the cash.

Public finances recorded a massive deficit last year and the same will happen this year as a result of the COVID-19 pandemic.

The extraordinary government spending, coupled with a loss of income as a direct result of the economic slowdown and deferred tax payments, contributed to the deficit. As a result, government borrowing has also shot up.

The advantage Malta has is that its debt-to-GDP ratio was approaching 40% just before the pandemic hit. This gave the government enough breathing space to run up two extraordinary deficits, while the debt ratio this year is still expected to remain below 70%.

This is the backdrop for Caruana’s balancing act, which becomes more complicated in the run-up to a general election when government faces demand for more spending from various quarters.

The time for uncontrolled public spending must gradually come to a close so that government can steady the ship and bring down the deficit over the next few years.

Returning to a surplus must be the final aim and a plan is needed to achieve this in a sustainable way that does not shock the economy.

A rapid withdrawal of government spending at this stage is not salutary. The economy, or at least parts of it, is still in recovery mode and there is still a lot of uncertainty internationally as a result of the pandemic’s uneven development across the globe.

But the Finance Minister must ensure that any government aid, measures and schemes targeted at the productive sectors have specific outcomes to encourage growth, employment and innovation.

Support measures in some areas may be tapered off so that money can be redirected to other sectors.

The government must also restate its commitment to invest €400 million in the improvement of industrial estates to create modern and new spaces for manufacturing industries.

Other measures must be aimed at encouraging women and elderly people to join the labour market, while providing social buffers for those who cannot do otherwise.

The minister must also consider some form of tax reprieve for the middleclass to boost spending power. Short of a change in income tax, the minister could increase the amount of tax refunds to all those in employment as part of its ongoing electoral pledge.

However, Caruana must also take a long hard look at discretionary spending in all ministries and public authorities to cut out unnecessary expenditure.

He should also freeze employment with the public sector apart from critical sectors such as education, health and the forces of law and order. The recent recruitment call for hairdressers by the Gozo Ministry is beyond belief.

The latter two proposals will not be popular on the eve of an election when ministers are inundated with requests for favours but are necessary to keep expenditure under control.

Caruana must use his economic thinking hat to chart out a five-year course over which the economy is encouraged back to growth, while the deficit is reined in.