A budget based on uncertain outcomes – MEA

The National Budget 2021 has been prepared in a period of great uncertainty, mostly due to the COVID-19 pandemic, the Malta Employers Association said. It is a global crisis that has affected all economies, and which has presented government with a fundamental dilemma, that of balancing between the priorities of public health and economic sustainability.

The Minister of Finance correctly thanked the business community for their resilience in retaining their employees to keep unemployment amongst the lowest in the EU. The fiscal packages announced during 2020 have been effective in sustaining the economy, and it is regretful that strategic decisions during the summer months resulted in an increase in COVID cases. Government is rightly utilising its fiscal manoeuvrability, due to surplus budgets in previous years and a fall in the Debt-GDP ratio, and, as expected 2020 and 2021 will incur substantial fiscal deficits which will increase the debt ratio to close to 60%. The extension of the COVID supplement to March 2021 is welcome and will certainly be influential in keeping unemployment relatively low in the coming months. This can be sustained through the €120m React EU funds and other funds which the EU has issued as a crisis response.

The budget consists also of a sprinkling of benefits and fiscal incentives targeting various sectors of society, with the increase in pensions and the VAT exempt thresholds being particularly effective. These measures and tax incentives will stimulate domestic demand. However, the increase in optional leave is a frivolous measure and will unnecessarily erode our national competitiveness.

This is not a ‘voucher budget’. The vouchers are targeted interventions that have been effective in helping the catering sector, and the re-issuing of these vouchers is positive. However this measure, costing €30m, has to be seen against a backdrop of a national budget that exceeds €4bn, the MEA said.

Although the Minister referred to growth projections in 2021, with GDP growth expected to maintain a robust increase of 5%, it is difficult to forecast the outcome of the budget and overall economic performance in 2021 due to two main factors: the duration of the pandemic and the outcome of the Moneyval evaluation

The Covid crisis has also resulted in an increase in bank deposits, as many people have increased their precautionary reserves due to the prevailing uncertainty. Many investment projects have also been placed on the back burner, as businesses expect recovery to take more than twelve months. This has a plus side since there is a pent up demand which may push the economy towards preCOVID growth, but it will depend on the speed at which the country emerges from the pandemic, and also through a determined effort to repair any reputational damage which Malta has suffered over the past years. Government will also have to address the issue of the correspondent banking in the coming months.