A wartime budget

The COVID-19 crisis is often talked in terms of a ‘war’; and by that analogy, Budget 2021 can best be described as a ‘wartime budget’.

Delivered under the shadow of a global pandemic that has wreaked havoc with government’s initial projections, it nonetheless delivered a stimulus package - underpinned by an increase in national debt - that tries to get the wheels of the economy going.

But like any wartime budget, it also serves as a stimulus for morale. It tries to inject hope in a period of gloom and doom, at a time when the latest surge in cases has renewed fears of an imminent recession.

In truth, however, this was already predicted before the recent upsurge; and may already be inevitable, despite the government’s comprehensive package of emergency measures.

Last September’s report by Standard & Poor - while retained its AA rating for Malta - forecast a sharp recession, with an 8% contraction in 2020, as a result of COVID-19 impact.

“Because tourism activity will likely be depressed for some time, we expect it will take until 2022 for tourist arrivals and hotel occupancies to return to 2019 levels. The pandemic may also hurt the arts, entertainment, and recreation sectors, which increased its share in Malta’s GDP to 7.6% in 2019 from 2.5% in 2000…”

Nonetheless, there were glimmers of hope in this bleak scenario.  The same report notes that the reduction of government debt to 43% of GDP in 2019, from 69% in 2011, also gives Malta fiscal headroom to withstand the economic shock associated with the pandemic.

The narrow space between these two outlooks, it seems, is the tightrope that Finance Minister Edward Scicluna had to walk to present what is possibly his last-ever (but Prime Minister Robert Abela’s first) budget.

The resulting effort uses the financial leeway gained over the past years of surpluses and debt reduction.

Without raising taxes, the government opted for a €100 million stimulus package that leaves more money in the pockets of families, pensioners and those on the lower end of the income scale.

The main drift of this package is clearly aimed at stimulating domestic consumption in a bid to make up for the shortfall in tourism, which will remain problematic for the foreseeable future. To this end, government has opted for a second tranche of vouchers, which will contribute €50 million in spending at restaurants and shops.

Perhaps more importantly, it will also extend the wage support scheme at least until March. This gives some vital further breathing space, to safeguard businesses and jobs that would otherwise surely be lost.

But the extension also delineates the limits of the space in which government can manoeuvre.

Government has so far not shied away from resorting to a financial stimulus financed through debt; and with projections that Malta’s debt-to-GDP ratio will hover around 59% next year- better than most EU countries –government can resort to more borrowing, if the going gets tougher: for now.

Short of an end to the crisis itself, however, there is a natural limit to how long this approach can be sustained. And much will depend on Abela’s handling of the crisis from now on.

When Labour came to power in 2013, debt was in the region of 70% and through targeted measures that fostered economic growth, government was able to turn its books into black and reduce debt without the need to raise taxes.

If Malta manages to cruise through this difficult period by keeping a sustainable debt-to-GDP ratio, it will be well-placed to press the throttle and stay ahead of the competition when the tide turns.

But government may also be overly optimistic about economic growth for next year. Whether reality will match projections will have to be seen, but this budget also reiterates a pledge to invest in industrial estate infrastructure, which would enable Malta to present a better offering to foreign investors.

With tourism practically decimated, government must look elsewhere for exports. A commitment to entice foreign direct investment is more than welcome, but has to also be accompanied by a hardball approach to attract industries in new niches.

So, while Budget 2021 does appear to present sufficient fire-power, at a glance, to at least kickstart a jittery economy, it may not be enough to see through a protracted crisis.

Nonetheless, it should be enough to raise morale, and inject some much-needed consumer confidence; and that, ultimately, is the role of a wartime budget, too.