Fiscal initiatives, cheque cashing behaviour and private consumption in Malta | Malcolm Bray, Reuben Ellul Dimech

One of the roles of government is to support the economy. In Malta, a policy tool which has been used over the past years is the distribution of financial assistance to eligible households via cheques. This is a temporary fiscal measure whose objective is to raise household income and hence support spending.

The assumption is that the physical distribution of cheques acts as a stronger nudge on economic behaviour compared to other channels. The approach of offering tax refunds, as opposed to the outright reduction in the tax rate, also carries the benefit that it makes it easier to reverse simply by not repeating this measure in future. The government estimated that in May 2023 the number of beneficiaries from the tax refund will amount to around 250,000 at a cost of some €26 million.

Bank of Valletta has a balance sheet size comparable to the entire GDP of Malta. This offers the bank a great opportunity to explore economic behaviour in Malta since its operations are closely linked to the overall financial transactions carried out in the country.

As a result, it is possible to generalise findings from internal databases to the rest of the economy. BOV considers it useful to share such data as a further source of economic information about Malta. Here we are presenting some statistics and insights in relation to last year’s distribution of government cheques.

Starting from mid-March 2022, two sets of cheques were distributed to eligible persons in Malta. These cheques consisted of a tax rebate and a payment to workers and pensioners to ease the burden caused by the spike in inflation. In the first set, the value of cheques ranged between €60 to €140, with the lower income workers benefitting from the higher rebate.

In the second set, the payment amounted to either €100 or €200, the cohort depending whether one was a worker or else a pensioner or on social benefits. The budgeted amount for the combined initiatives was in the region of €70 million, distributed across some 580,000 cheques.

As a result, the number of Government cheques which BOV processed increased significantly in March 2022 and in subsequent months. The transition towards greater use of technology was confirmed. Indeed, the preferred encashment channel was via ATMs or express deposit facilities, which accounted for some 90% of the total cheques which were distributed by the government.

Only around 10% of encashments were over the counter at a BOV branch. BOV continues to encourage its clients to make the best use of technology, particularly through ATMs, since these are more efficient and less costly compared to branch encashment.

Last year it took slightly more than four months for the cheque processing activity to return to its normal levels after the surge seen in March. By the end of June 2022, approximately half of the additional Government cheques were processed by BOV, consistent with the Bank’s typical market share in this retail activity. Some two-thirds of the excess cheque activity was processed in March and a further one-fifth in April.

These statistics suggest that most households were quick to cash their cheques, which is a desirable feature since the objective of such fiscal assistance was to sustain domestic demand, cognisant of the fact that lower income households tend to have a higher marginal propensity to consume.

An analysis using BOV data, based on randomised samples suggests that the clients who deposited these cheques did indeed subsequently carry out higher monthly withdrawals or card payments compared to their normal patterns.

The cohorts identified exhibited an increase in withdrawals across multiple banking channels, with growth rates ranging between 18.0% and 8.4%. This indicates the existence of a possible direct link between the fiscal initiative, and consumer expenditures in Malta.

This supports the view that there was a positive stimulus to demand which, along with other factors contributed to the exceptionally high 10.1% real growth in private consumption in 2022, as measured by the National Statistics Office in their 2022Q4 national accounts release (NR036/2023). Indeed, private consumption in Malta has fully recovered from the pandemic, and in 2022 reached a level which was 6.5% higher than in 2019.

The views expressed in this article are those of the authors and do not necessarily reflect the views of Bank of Valletta. Issued by Bank of Valletta p.l.c. 58, Triq San Żakkarija, Il-Belt Valletta VLT 1130. Bank of Valletta p.l.c. is regulated by the MFSA and licensed to carry out the business of banking in terms of the Banking Act (Cap. 371 of the Laws of Malta).