Resolutions on 2024 economy
This article borrows extensively from the fiscal report issued under the Fiscal Responsibility Act, exclusively by Malta Fiscal Advisory Council (MFAC) dated November 2023
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 an improved fiscal deficit. The need for government policy to be more export driven rather than based on increased private consumption and government expenditure. Better export potential should arise from an enhanced quality rate of tourism, remote gaming, manufacturing and a strong revival of financial services.
What are the reflections that emerge out of this report. A major expenditure of €320m is the capping of energy and cereals prices to ensure stability and tame inflation. There is still a mystery how much of this cash subsidy, going to Enemalta/Electrogas utility companies, churns profits to Chinese shareholders (running Mozura and BWSC plants) and to the private shareholders of Electrogas.
More detailed information may be available in public domain, once audited accounts are published. The Commission commented against granting such state subsidies. It recommends that these funds should instead be re-directed towards reducing the burgeoning public debt. Some have forgotten the profligate policy of subsidies and the other components in total expenditure during the years of the pandemic. The MFAC report favourably notes the public debt ratio is ex
pected to remain below the 60% threshold as dictated by the Maastricht rule. Obviously, as ECB hiked up interest rates to subdue inflation, one expects a higher cost of servicing our enhanced debt levels.
This interest is estimated to hover around €500,000 daily. As can be expected, 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% last year (compared to almost 6% in 2022).
During the past three years, MTA granted a £143m subsidy to producers of Hollywood films shot locally and this is expected to feature again this year. The MFAC projects that the debt-to-GDP ratio to fall just below 40% in 2025. 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 leased planes.
Upgrading of hardware has caused many flight delays this season. The Finance Ministry is exerting prudence 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 in 2023, the Finance minister instructed big spender departments and government agencies to cut back expenditure – collectively by €200m. Above all, projections in the MFAC report are subject to changes in exogenous factors such as the intensity of the Russian war in Ukraine, the hostilities in the Middle East and attacks by Houthi rebels on merchandise ships sailing via the Red Sea.
Another critical factor is the shortage of skilled labour. A similar situation prevails in Britain, which faces 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 upskill low-skilled workers on a national scale and not continue to rely excessively on imported workers so as to take advantage of lower wage costs. Equally, eloquent was Finance Minister Clyde Caruana. He told Parliament at the start of 2022 that the government cannot continue to tolerate a situation where many businesses get away with not paying their taxes, thus creating an uneven playing field with honest taxpayers, "the government is not an overdraft facility" he insisted.
Some blame ingrained lacklustre attitudes in tax debt collection as a policy not to dirty waters with voters. The Auditor General’s report on the government’s finances detailed how the bulk of the €4.6bn in VAT arrears can never be collected, while of the remaining €300m, €135m was under contestation pending court action.
In conclusion quoting Joseph Zammit Tabona, who last December, co-organised a successful Malta event held at Guildhall London. This attracted many top investors. His prophetic vision is that Malta has the professional skills, the political will and resources to re-invent itself. The motivation for doing so is not hard to identify and harness. If well executed, an export boost secures the future’s well-being of each one of us, our families, extended communities, thereby guaranteeing environmental sustainability, meritocracy and good governance.