Editorial | Redirecting subsidies and reducing debt

Prime Minister Robert Abela’s recent declarations in which he committed his government to continue subsidising energy and fuels to stave off the inflationary pressure is welcome news.

Government had already made budgetary provisions for this year by earmarking almost €600 million in subsidies. Added to this was the more than €400 million spent on energy and fuel subsidies last year.

Over a two-year timeframe, Malta has raked up a bill of €1 billion in energy subsidies.

The ramifications of government’s strategy to fork out so much money in subsidies are twofold: for starters, the money has insulated the Maltese economy and families from energy price inflation thus ensuring growth is not stifled; and secondly, it has increased the public debt.

It is the latter that should be of concern going forward even though Malta’s debt-to-GDP ratio is better-placed than that of many other EU countries.

It is obvious that forking out hundreds of millions in subsidies is not a sustainable strategy in the long-term. Malta has to start weaning itself off these subsidies and the Finance Minister has a duty to chart out a course in which these moneys are reduced gradually.

This has to be viewed within the context of new debt rules that the European Commission is proposing as part of the reform to the Stability and Growth Pact.

The rules governing spending were relaxed when the pandemic hit to enable governments to go on spending sprees to fund medicines, medical equipment and shore up their economies through wage support measures. It is now time to roll back this free-spending mentality and replace it with new rules that reintroduce debt-controls while allowing member states the leeway to invest heavily in, even subsidise, strategic infrastructure and green projects.

The debate at EU level is not going to be an easy one. The so-called hawks, led by Germany, want stricter debt rules to avoid the circumstances that led to the financial crisis of 2008.

Others like Italy and France want less onerous rules.

The European Commission is trying to propose a midway route with individualised debt-reduction plans negotiated with each member state rather than a blanket rule that applies across the board.

This leader believes that a return to the old Growth and Stability Pact rules will not be salutary within a changed world, where the EU is still reeling from the aftermath of its energy dependence on Russia and facing stiff competition from the US and China.

Member states must be allowed to invest money in strategically important sectors such as microchip production, green energy (which should also include nuclear), medicine production and medical research, defence, transport and logistics.

These investments will invariably come at the expense of higher debt but with a view of raising economic output and allowing the EU to become more autonomous.

Within this context, Malta should also start to steer its spending strategy towards the productive sectors to encourage long-term growth, job creation, and cleaner energy production that gives the country a level of self-sufficiency.

Phasing out subsidies on fuels could be a starting point with government redirecting a substantial part of those funds towards clean energy infrastructure.

Projects such as the proposed floating offshore wind farm off Gozo have to get off the drawing board so that the country can start to benefit from this clean source of electricity in the next decade.

The country also needs a comprehensive investment plan in its medical infrastructure, especially after the Steward hospitals concession fiasco. The funds for this can come from the money saved from the subsidies.

Added to this, the Finance Minister must also keep a tight rein on spending by his colleagues. Government fat must be cut and expenditure redirected in a meaningful way towards improving the pay of key sectors such as healthcare, law enforcement and education. Trimming down the number of persons of trust and consultants on the public payroll will make this exercise more politically palatable, albeit the savings achieved will be relatively minimal.

Malta’s debt is not yet a problem and new EU rules, whichever way they go, are unlikely to have a punishing effect in the immediate future. But judicious planning is required so that the government gets back to the debt-reduction strategy adopted between 2014 and 2019, even if it adopts a more gradual and protracted approach to cater for critical expenditures.