Projections on a 2024 economy

This article borrows extensively from the latest fiscal report issued under the Fiscal Responsibility Act, exclusively by Malta Fiscal Advisory Council (MFAC). It is encouraging to note, that the MFAC reiterates a caveat in view of the current circumstances in the global economy, reflecting a sensitive macroeconomic outlook.

Certain assumptions are critical to the projections made. These incorporate the future development rate of tourism, remote gaming, manufacturing and financial services. What are the salient statistics that emerge out of this report. One starts by mentioning the increase in 2022 of national debt by €866 million, yet so far it appears that the debt to GDP ratio will hover around the prescribed level of 60% - this is the higher limit mandated under the Maastricht rules but recently temporarily relaxed due to Covid 19.

What is the main cause for such an increase in debt? For a true answer, one needs to examine various factors but it is easy to assume that the cash grants and vouchers issued by Malta Enterprise during the two years of Covid contribute to the lion share of debt.

Another major expenditure, is the capping of energy and cereals prices to ensure stability and tame inflation. Notwithstanding this, both total revenue and total expenditure have been revised upwards, mainly due to higher current taxes on income and wealth as well as higher expected costs in subsidies reflecting such energy support measures. The MFAC favourably notes the public debt ratio is expected to remain marginally below the 60.0% threshold.

Obviously, as ECB continues to raise interest rates to subdue inflation, one expects a higher cost to servicing our enhanced debt levels. This interest is estimated to hover around €500,000 daily. As stated earlier, the MFAC points out the unexpected high stimulus cost of the pandemic which led to two consecutive years of large fiscal deficits.

The large deficits in 2020 and 2021, led to a steep increase in the debt ratio, contrary to the consistent declines which were experienced previously. Malta's economy is forecast to grow at a significantly higher rate of 3.9 per cent this year (compared to almost 6% previously).

Previous high-spending tactics (such as a multimillion subsidy of Hollywood films shot locally) will soon need to be reined in, however, as the EU looks to curb inflation by revising its fiscal policies to reintroduce limits on deficits and debt levels.

The MFAC projects that the debt-to-GDP ratio to fall just below 40.0% in 2025. Non-discriminatory subsidies are always criticised in modern economic theory as these tend to be wasteful yet they remained high as pandemic support continued.

One cannot omit to mention the haemorrhage of funds to buttress the struggling AirMalta airline. Losses are causing the treasury a heavy drain as the airline badly needs fresh capital to buy modern aircraft to its arsenal of 100% leased planes. Lack of hardware has caused many delays this season.

The MFAC report reveals other subsidies reach €10.0 million in 2022 and €75.0 million in 2023. This is a sign of times that employees claim subsidies to make up for cost-of-living increases based on a study conducted on previous year. eg, COLA of €9.90per week this year to reach €13.5 in 2023.

A novelty is the plan to shift public investment from that on public infrastructure, road and transport networks to incentives encouraging thus more green and digital investment. The hon Miriam Dalli personally appointed an ex-banker to head a €700 million green project to start full scale afforestation and rapid creation of more green parks.

Back on the subject of energy and food subsidies, this has been remarked upon by The Commission which suggested that such subsidies should be re-directed towards reducing the burgeoning public debt. Some, may have forgotten the profligate policy of subsidies and the other components in total expenditure during the years of the pandemic. This splurge reflected the cash assistance provided by Malta Enterprise to support employment through various initiatives including furlough schemes.

The Finance Ministry is exerting prudence in allocating less funds for 2023/4 with respect to mitigating the sharp increase in public funding schemes run during the two years of pandemic. The media revealed that minister has instructed other big spender departments and government agencies to cut back expenditure -at least by €200 million.

Above all, the projections in the MFAC report are subject to changes in exogenous factors such as the intensity of the Russian war in Ukraine and success in taming of inflation within Eurozone. It is heartening to note, that the risk assessment carried out by the Fiscal Council suggests that both the fiscal balance and public debt could possibly fare better than expected by the Ministry of Finance.

In this European slowdown, many ask what is the effect on our economy as Britain is expected to face persistent inflation this year and next? Before the onset of a slowdown, Malta enjoyed the highest number of tourists to arrive from Britain.

This year, partly due to unbridled competition from cheaper holiday resorts, the statistics changed. Less Brits albeit partially replaced by a higher influx of Italian visitors.

Another critical factor is the shortage of skilled labour and the national policy of Identity Malta in widely opening the flood gates for more third country unskilled migrants. A similar situation prevails in Britain, which is currently facing shortage of workers, widespread strikes with constant demands for higher pay.

Quoting the UK opposition leader, Sir Keir Starmer, he insists that the UK priority should be to up-skill low-skilled workers and not continue to rely excessively on imported workers so as to take advantage of lower wage costs.

Other exogenous factors in UK, include the global effect of the energy and food components which contribute to sky-high inflation.

In conclusion. Malta has the experience, the political will and capacity to rescue itself from a stiff recession next year, should it choose to do so. The motivation for doing so is not hard to identify and harness – if well executed the road map secures the future well-being of each one of us, our families, extended communities, thereby guaranteeing environmental sustainability.