The energy subsidy dilemma

The government has pledged to continue to subsidise energy and fuel till at least the end of 2024. Another €350 million are set to be spent on this exercise to keep stability in the sector and to keep inflation down.

It is a matter of fact that, if the government had to pass on the increase in energy and fuel that other countries are experiencing as a result of international events, inflation would have been much higher in 2023 and would be higher too in 2024. This would have meant that the record €12.81 weekly Cost of Living Adjustment that will start to be handed out in January would have also been higher, and the ripple effect would have continued.

This subsidisation, however, has its downside too.

The European Commission is already breathing down the government’s next to start phasing out the subsidy. The Chamber of Commerce is insisting that the government gives at least six months’ notice before the subsidy is removed, to enable the business community to plan. So far, there is no indication that the government intends to stop the subsidy anytime soon.

Also, as a result of the subsidy, the government’s deficit and debt has continued to rise in the past years. The country was already in difficulty because of the Covid-19 pandemic, which forced the government to take drastic action to stop the economy from collapsing and for businesses to remain open. The economy has recovered, but the deficit and the debt has continued to rise. We are moving closer to the €10 billion mark when it comes to debt.

The government believes that by keeping fuel and energy prices stable it is helping consumers and businesses. But at the other end of the scale the money is coming from somewhere, and the costs we are saving today will have to be collectively paid later.

The Nationalist Party, for its part, is warning that the energy subsidies cannot last forever, a message that the Labour government is interpreting from a partisan angle by saying that the PN would no longer maintain the subsidy, with the result that the price of fuel and energy will rise sharply. But deep down the government knows that, sooner or later, these subsidies will have to be removed.

We already know that the European Commission is asking the European Council to open excessive deficit procedures against Malta for exceeding the three per cent deficit limit outlined in the Maastricht Treaty. Malta will not be on its own, as several other countries are facing the same issue.

One of the recommendations that the Maltese government has been asked to do to bring its books in order is to remove the energy and fuel subsidy. So far, the government has ignored this recommendation, and proudly announced in the budget presented last week that the subsidies will continue to be given.

This arm-wrestling match with Europe is bound to stretch into 2024, possibly beyond.