Energy subsidies cannot last forever

Speaking at a party event at the PL’s Rabat club on Sunday, Prime Minister Robert Abela turned his guns onto the Opposition: warning that – by targeting the government’s policy of subsidising electricity tariffs – the Nationalist Party was trying to deprive Maltese families and businesses of a vital ‘lifeline’.

“The PN wants us to stop energy subsidies,” he bluntly remarked. “Is this why the PN wants to protest? Because we are helping people?”[...]  “We believe we should continue to help all our families and businesses with energy prices; and if you believe this too, join us on May 1 to send a clear message in favour of help for the people.”

On his part, Opposition leader Bernard Grech denies Abela’s claim: insisting that the Nationalist Party was actually criticising the government’s ‘failure to invest in renewables’, and not the subsidies themselves.

But this only means that the country’s two main political forces are united in upholding these energies subsidies: even though they currently cost Malta more than €400m annually; and this may push the national deficit beyond the limit set by the EU’s ‘Growth and Stability Pact’, possibly triggering an excessive deficit procedure.

Indeed, the subsidies themselves were only made possible by a “general escape clause” – written into the European Union’s treaties – that allow member states to override the Stability Pact, in emergency situations.

It was because of the Covid pandemic – and later, the war in Ukraine  - that EU countries were allowed to spend more than is usually  permissible, to safeguard their economies, and the livelihood of millions of struggling families.

The European Commission, however, has already indicated that this ‘escape clause’ will be stopped at the end of this year; and that countries would once again have to lower their spending.

And while these subsidies were essential in preventing a massive dip in living standards, at a time when families were already struggling with inflation in food prices:  cutting them today – when those inflationary pressures are so much stronger -  would simply condemn a large section of the population to poverty.  Moreover, businesses would also take a hit, and possibly pass on their losses to the consumer: thus further exacerbating inflationary pressures.

In this sense, subsidising energy prices was clearly the right thing to do, from a social perspective. Along with other countries, Malta would do well to make a strong case, at European level, against any abrupt ending of the “escape clause”: which may undermine the prospect of economic recovery, and force governments to resort to austerity at a time when their populations are already taking the brunt of inflation.

Meanwhile, the extra spending has not, so far, visibly ‘undermined’ the country’s finances. Malta’s public debt may have increased to from 40% of GDP in 2019,  to an estimated 55.3% of GDP by end-2022 But this remains in line with the government’s goal to keep the public debt burden close to 60% of GDP.

This means that, at least for now, Malta is in a far better fiscal position than other EU economies.  And besides: EU governments should be aware, by now, that ‘inflicting austerity in a time of inflation’ is a recipe for disaster: as well as a gift to far-right populists.

But there is also another side to the story. Clearly, there is an ‘opportunity cost’ here: for energy subsidies divert funds, which otherwise could address other pressing social and environmental needs.  In short, the country needs public investment in other vital sectors like health, education, green spaces, public transport, and social welfare.

In this sense it is of utmost importance for Malta to embark on a medium-term strategy on phasing out some – if not all – of these energy subsidies.

For example, government could start by distinguishing between ‘subsidies for electricity’, for both household and business, and ‘subsidising petrol for cars’: especially in view of the fact that the government is already subsidising free public transport.

Moreover, the government now needs to invest more - not less - in public transport, to ensure that there are enough buses to cater for increased patronage.  And while people have no alternative to ‘switching on the light in their home’: public transport can be an alternative to car-use.

Secondly, the country needs a clear roadmap on renewable energy sources like offshore wind turbines, offshore solar farms, and possibly green hydrogen, exclusively produced using renewables.

Although these will not overnight eliminate the need to import gas and other energy sources through the interconnector; in the long term, they offer the best ‘exit-strategy’ from our near-complete dependency on imported fuel.  The fact that the country wasted decades, before embarking on these sectors - as most other countries were prioritising them - simply boggles the mind: especially in view of the country’s climate change commitments.

In these circumstances, Abela’s government deserves praise for keeping the economy afloat in a time of crisis - while shielding the population from austerity - but it has clearly not done enough forward-planning, to reduce Malta’s energy dependency on increasingly expensive fuel sources.

And given that there is already so much international pressure to end these subsidies, anyway: now would be a good time to start.