This is not ‘business as usual’

Interviewed on the Labour Party’s radio station last Friday, Prime Minister Robert Abela took pains to sound as upbeat as possible, about the economic challenges ahead.

To be fair, his optimism is not entirely misplaced. NSO statistics indicate that Malta’s economic growth reached almost 9% in the second quarter of this year – which, as Abela proudly noted, is ‘the highest in the EU, and more than twice the average’ – while unemployment hit another record low in July.

But while the Prime Minister was quick to attribute this success to what he described as his government’s ‘progressive policies’, there were moments when he struggled to conceal his own anxiety about the rising cost of those policies, to an already overstretched national exchequer.

When it comes to inflation, for instance, Abela reminded us all that – unlike the case with other European countries – his government had taken the “strategic decision” to absorb the hike energy and fuel prices itself, rather than passing the burden onto the consumer. Abela also said that this decision has already yielded dividends, “by giving businesses in Malta a competitive advantage and offering families peace of mind about their spending power.”

This is undeniably true: Maltese businesses and households are indeed being shielded from higher electricity and fuel prices, by a government subsidy that – when announced in April this year – amounted to an estimated €200 million a year.

Not only does this help to keep energy and fuel prices stable – at least, for as long as government can afford to continue absorbing the cost – but it will also allow Maltese companies to have a competitive edge over their European counterparts; and this must not be underestimated, especially with employers complaining of the impending high COLA increase next year.

Even within this context, however, government would be wise to ditch the mantra that it’s “business as usual”.

Subsidising energy and fuel is an expensive solution, especially with no end in sight for the war in Ukraine, and flies in the face of climate-neutral policies. While Malta’s inflation may indeed be ‘the lowest in the EU’, this is only because of the massive subsidies on fuel and electricity. If these subsidies were removed from the equation, Malta’s inflation would actually be higher than the EU average: and it is primarily driven by the higher cost of food, and other essential products and services.

Moreover, international energy prices are only expected to carry on soaring upwards. Last week, Malta paid its highest ever price for energy through the European interconnector, at €608 per megawatt-hour. That represents a six-fold increase of the price paid only two years ago; and experts now predict that it may even increase to €700, and beyond, next year.

Even at current prices, however, Finance Minister Clyde Caruana will at some point be forced to curb public spending, to ensure the deficit does not spiral out of control. Indeed, government is already conducting a spending review, asking ministers to find €200 million in expenditure cuts this year (the much-maligned €1.1 million cut in University funding was part of this wider exercise).

It is mainly from this perspective that Robert Abela’s boastfulness may start sounding rather hollow. For while it is true that (for now, at least) the government still has leeway to run relatively high deficits; it doesn’t mean that ‘running high deficits’ is the only way a government can cope with energy inflation.

Indeed, it would not be amiss to ask if the Prime Minister has really given enough thought to all the options available to him: which might also include a public information campaign, to encourage people to scale down their own electricity consumption and fuel use.

Ideally – and wherever possible – people should be encouraged to use public transport and shared taxis, instead of their private car. Meanwhile, the energy-saving guidelines government has issued for its own entities – switching off public facades at night, setting threshold temperatures for AC units, etc. – could easily be replicated (possibly through incentives) in the private sector.

And while supporting households and businesses, through electricity subsidies, may be necessary to avoid an economic crisis; it doesn’t follow that fuel prices should be so generously subsidised as well.

In a country where vehicular exhaust accounts for such a high proportion of air pollution – and all associated health issues – Clyde Caruana should seriously consider asking motorists to share the burden of higher fuel prices, through a staggered increase spread over six months. (And with government already planning to provide free public transport for all, come October, there is even a case for subsidies to be gradually withdrawn from fuel altogether).

Additionally, certain electoral pledges that require massive outlays could be delayed, to redirect expenditure towards the more vulnerable, and where it is more necessary within the circumstances. 

So rather than adopt a blanket approach, government should redirect fuel subsidies to support those with low incomes, the elderly, and families with children.

Above all, however: just as it is important that public finances remain within sustainable parameters, it is equally important to lull the country out of its false sense of security.  For the reality of the situation is that: no, this is not ‘business as usual’.