Dear Clyde, don’t forget the middle class

The Maltese economy’s headline figures are good, especially when compared to those of other EU member states. 

The debt-to GDP ratio remains below the 60% mark and is healthier than that of other European powerhouses like Germany and France. This is one of the most crucial indicators since it determines what leeway the government has if push comes to shove.  

Inflation is lower than most EU member states, although this is the result of government’s policy decision to pump hundreds of millions of euros in subsidies for fuel, energy, gas, animal feed and cereals. 

The annual deficit is among the highest but government is projecting a yearly decrease, starting from the current year which is expected to end with a lower deficit than anticipated. 

Unemployment remains at its lowest level ever and the economy has continued to grow, albeit at a slower pace. 

Tomorrow, when Clyde Caruana steps up in parliament to deliver the second budget of this legislature he will undoubtedly draw parallels between Malta and other EU countries. He will insist that Malta’s close to zero unemployment is testament to the country’s strong economic fundamentals. He will speak of a public debt burden that the country can well afford and which puts it in a better position than most EU member states. 

He will also heap praise on the rate of economic growth that ensures government can reap more income without the need to raise taxes. 

But Caruana will also sound a cautionary note over the need to fine tune public spending and direct it where it is most needed so that expenditure does not become a burden. 

The Finance Minister will attempt a balancing act between tightening the purse strings and spending enough to strengthen the welfare state, bolster the country’s infrastructure and encourage economic growth and diversification. 

In this complex exercise, however, Caruana must not forget the middle class – that powerful engine made up of ordinary people who work hard, do not depend on welfare benefits and use their spending power to prop up the economy. 

The middle class over the past decade – also thanks to policies adopted by the Labour administrations since 2013 – has grown in number. It also achieved a level of comfort that had fizzled away prior to 2013 in the midst of a gloomy economic scenario and political instability that characterised the last Nationalist legislature. 

But today, despite the headline figures showing a country that is doing relatively well when compared to other EU member states, the middle class is feeling its lifestyle being challenged as inflation squeezes pockets. 

The financial buffers in the form of savings that people made during the two COVID years – reflected in the rise in bank deposits – are now starting to erode. As wages fail to keep up with the pace of inflation, people are now eating deep into those savings. 

The situation may not yet be desperate but the trajectory is clearly going in that direction as people try to maintain their standard of living by either working more overtime or taking on a part-time job. 

The pressure on the middle class has been growing steadily. An Economic Note penned by former prime minister Joseph Muscat last month reflected on survey findings that suggested the post-pandemic recovery in consumption has come to a halt and consumers are now “cutting back on discretionary spending” as a result of inflationary pressures. 

Tomorrow, Caruana will argue that government’s decision to keep subsidising fuel and energy is the biggest reprieve he can give to the middle class. He will also quantify the cost savings a family with two cars and average electricity consumption will be making in 2024 as a result of prices being kept stable. 

He will argue that government has made a conscious choice to help families and businesses by shielding them from rising international energy prices. 

But Caruana must also realise that people will compare their current situation – a lifestyle under pressure – with how it was up to a few years ago and not how it could have been had the government not subsidised energy and fuel. It is really a question of expectations. 

The generous subsidies are keeping Malta’s inflation rate in check but a closer analysis shows that if energy and fuel are to be kept out of the equation, Malta’s cost of living is at the upper end of the EU table. Despite the generous cushion, people’s pockets are still being squeezed and the impact will continue being felt with more intensity next year. 

Wages will increase by €12.81 per week in line with the COLA mechanism. This on its own will hardly leave an impact. 

What the middle class needs is a permanent tax cut that leaves more money in its pocket every month. 

At a very basic level Caruana must adjust the tax thresholds to ensure the COLA increase will not be eaten away because people would have jumped into a higher tax band. This has been the call of every union and is also supported by employer organisations. 

But this leader believes Caruana must do more. 

The existing regime means that someone on the parent rate earning €15,801 is charged at the same tax rate of 25% as someone earning €59,000. The existing regime only has four brackets – the non-taxable portion, 15%, 25% and 35%. The topmost rate applies to those earning more than €60,000, with a vast swathe of taxpayers gravitating within the 25% bracket. 

This leader believes that the non-taxable portion has to increase substantially and a new tax rate of 20% should be introduced to differentiate the mass of earners that currently pay tax at 25%. 

A permanent tax cut of this nature provides more effective relief than the lump sum tax refund government has been paying out on a yearly basis. Indeed, the lump sum payment could be replaced by the permanent tax bracket adjustments. 

The middle class is calling. We just hope, Clyde Caruana is listening.