Malta’s public finance review: Good, but can improve

The European Commission has published its first assessment of national budgets under the new economic governance framework that came into force in April this year.

The new rules represented the most ambitious and comprehensive reform of the EU’s economic governance rules since the aftermath of the economic and financial crisis of 2008. Although the rules have not waivered on the sustainability benchmarks for deficit and debt – set at 3% and 60% of GDP respectively – they now allow for more flexibility in reaching the desired goals over a longer period.

The stated aim of the new economic governance framework is to “make the EU more competitive and better prepared for future challenges by supporting progress towards a green, digital, inclusive and resilient economy”.

The assessment covering the 2025 European Semester has found Malta to be ‘not fully in line’ with the recommendations made by the Commission earlier this year since the country will not be phasing out the energy support measures by winter 2024-2025. Even so, the net expenditure is projected within the net expenditure growth ceilings. Luxembourg and Portugal are in the same position as Malta.

In simple terms, what Malta’s assessment shows is that the country’s public finances are on the right trajectory but could be on a stronger path if the government phases out energy and fuel subsidies.

The underlying argument is that if the subsidies are withdrawn, the government could reduce its yearly deficit more significantly while liberating funds for infrastructural investment.

Nonetheless, the headline figures confirmed by the European Commission still show that despite the energy subsidies, Malta still plans to reduce the deficit next year even if it will remain above the 3% target.

Malta’s finance minister has been arguing that the energy and fuel subsidies are a form of investment because they have kept utility bills and petrol pump prices stable, giving families and businesses certainty over a lengthy horizon period. This stability has allowed businesses to invest and grow, while ensuring public finances remain sustainable.

The finance minister’s argument is not without its merit. Malta’s GDP growth has remained well above the EU average with several economic sectors recovering well in the aftermath of the pandemic and the despite the ongoing war in Ukraine.

Additionally, Malta’s public debt – a key parameter to assess a country’s resilience and ability to withstand shock – is projected to reach 50.1% of GDP next year, according to the finance ministry and 50.4% according to the Commission’s forecast.

Malta’s debt-to-GDP ratio is well below the recommended 60% threshold – indeed, it represents the sixth lowest government debt in the EU.

For comparison’s sake, the Commission is forecasting that Germany’s debt next year will hit 63.2%, France’s will be 115.3%, Italy’s 138.2% and Belgium’s 105.1%.

This shows that Malta is well-placed to absorb any future shock without significant disruption to its finances and this is not something that should be underestimated.

Within this context Malta affords to sustain the subsidies on energy and fuel. But the indiscriminate nature by which they apply can serve as a drag on meaningful capital investment.

This is why this leader believes that the government must draw up a plan to phase out the subsidies on fuel and introduce targeted support for vulnerable and low-income families, and small enterprises rather than adopt a blanket policy that treats rich and poor, strong and weak in the same way.

There is also a long-term political consideration to be made. The energy prices we pay today are those that were set in 2014, while the price of fuel has remained the same as that established in June 2020. People have got used to the low prices irrespective of how international markets are performing.

This situation makes people oblivious of the need to conserve energy, reduce waste and invest in energy efficient appliances. On a political level, the situation makes it hard to restore price relativity with the international market without experiencing a crash landing. And the longer it takes for the government to draw up a phase out plan, the harder it will become over time.