Budget 2024 | A social budget… only for some

Clyde Caruana’s budget for 2024 is conditioned by two linked straightjackets: inflation and the energy subsidy.

Inflation has been eating away at disposable income and has left its mark on low and medium income earners.

Prices of essential items, including food and household maintenance services, have been rising and maintaining the standard of living has become a struggle for many families.

Undoubtedly, low income earners, including pensioners, have had to shoulder the heaviest burden since the bulk of their limited budget is spent on food and medicines.

Food has persistently been an inflation driver over the past 12 months and yet there is nothing in the budget that tries to address this. The government must ensure the market is functioning well and intervene where increases are the result of pure greed and not necessity.

But inflation has also hit middle income families hard as they strive to keep the comfortable standard of living they have come to expect.

Much of the budget measures are targeted towards alleviating the burden on low and lower middle income earners.

Widening the eligibility of the additional COLA to benefit more families is a positive measure.

The significant increase in the children’s allowance by €250 per child is also an important measure that will go some way to alleviate the costs associated with upbringing. It is a welcome move that families with children will benefit from in no small way.

But the minister’s actions are also conditioned by the hefty energy and fuel subsidy. The hundreds of millions of euros dedicated to keeping the price of fuel, electricity and wheat stable are acting as a straightjacket on the minister’s ability to manoeuvre.

Admittedly, the massive subsidy, which is projected at €350 million next year, serves as an economic stimulus for export businesses since their energy costs are capped when compared to competitors abroad. For other domestic oriented businesses and families, the subsidy shields them from what could be a significant cost burden.

The biggest question mark that will undoubtedly linger is for how long the country can afford to sustain this indiscriminate subsidy at such high levels. Caruana is projecting to maintain this subsidy at least until 2026 – a year shy of the next general election.

It is no coincidence that Caruana’s horizon goes that far since the decision when to withdraw the subsidy and how to do it will probably be the most politically critical decision he has to take in the next four years.

Malta’s electricity prices are frozen at 2014 prices and petrol and diesel prices have remained unchanged since the summer of 2020.

If the subsidy is withdrawn after 2026, one can hardly expect the market prices at the time to be frozen at 2014 and 2020 levels respectively, which could result in an expenditure shock for businesses and families.

Nonetheless, there does not seem to be any attempt at a gradual withdrawal of the subsidy, or at the least adopt a targeted approach to help those most in need. There is also no attempt to differentiate between electricity support, which is an essential need, and fuel support.

The subsidy straightjacket is the reason Caruana has strayed away from introducing a tax cut that benefits middle income earners. He has couched it in terms of fiscal prudence, which is something we will not dispute. But an income tax cut can be phased in and partially compensated by a higher VAT rate on luxury products and services.

The minister has argued for the second year running that a middle-income family could be saving as much as €1,400 per year as a result of the energy and fuel subsidy.

The problem is that the saving is intangible to families that continue to see their standard of living erode as a result of inflation. Apart from the children’s allowance measure, middle-income families have little else to look forward to from the budget.

For these families, 2024 will be another year of hard work where they will continue to gasp for air as they strive to maintain their standard of living.

Indeed, the budget is truly a social one but only for some.