Inflation is here to stay, Clyde Caruana warns while promising 'expansionary budget'

Next year’s budget will still be an “expansionary” one despite the fact that inflation far beyond 2% is here to stay, Finance Minister Clyde Caruana has stated. 

Caruana listed a number of external factors that will shape Malta’s future fiscal policies while addressing press and social partners during a meeting with the Malta Council for Economic and Social Development (MCESD) ahead of this year’s budget. 

Among other external factors, Caruana noted that the world is still experiencing supply chain problems after the Covid-19 pandemic and the Russian invasion of Ukraine. This, Caruana said, has had a number of effects, namely the rising price of oil and an inflation rate which is very far away from returning to its regular state of 2%.

The extraordinary inflation rate, Caruana explained, is the primary reason why international interest rates are set to remain high and why economic growth across the EU is set to be relatively small.

The finance minister noted that the situation has lead to the EU once again discussing its “general escape clause,” so that countries whose debt exceeds 60% of their GDP, and countries whose deficit exceeds 3% enter excessive deficit procedures. Caruana stated that the EU’s finance ministers are currently discussing the procedures relating to how a member state exits such procedures, but the outline of the clause has reached a consensus.

Caruana noted that after the clause is agreed upon, member states who enter excessive deficit procedures will either be given four years to fall back in line with the established thresholds or will be given seven years to do so while the European Commission dictates the changes that are needed to be made.

“We’ve been aiming for a deficit of 5%,” Caruana noted, while stating that Malta too must fall in line with the EU’s rules unless it wants to be subject to excessive deficit procedures.

Despite this, Caruana stated that government is still aiming for “an expansionary budget” where government injects more money into the economy than it receives. “We must ensure that this expansion is reached while we are in line with the EU’s thresholds.”

This, Caruana said, is in the interest of all employees and employers, as he acknowledged that government spending also gives way to inflation.

Concluding his intervention, the finance minister noted that government will also work to keep Malta below the 60% debt threshold.