Fact-checking the PN’s billion-euro debt criticism

Malta’s public debt remains manageable, growing to around just over 62% of GDP in 2024, a far cry from the over-75% levels Malta had when it had just become an EU member state

€2.3 billion in new debt, says the PN billboard (right)
€2.3 billion in new debt, says the PN billboard (right)

Is Malta’s level of public debt truly unprecendented? So scream the Nationalist Party billboards that complain of Malta’s high deficits and debt, a mere two years after the COVID-19 pandemic introduced massive costs: health spending, vaccinations, and economic and wage subsidies.

The Labour administration seems unpeturbed by the fiscally conservative criticism: one PN billboard in Msida has been placed alongside an Infrastructure Malta billboard that boasts of a €400 million roadworks investment. Across the road on the Msida roadside, is a new social housing complex that points to the kind of spending that has informed the debt programme.

The PN criticism arguably has been tone-deaf in the way it lambasts the “worst ever recession” Malta found itself in, when COVID dropped economic growth levels but still forced the government into a massive subsidiy programme for businesses to pay employees, rents and energy bills.

Indeed, it appears the recession criticism from the PN refers to the COVID-19 recession in the first half of last year.

But Maltese voters rate highly the government’s performance on economic management and disposable income, as a recent MaltaToday survey shows, ranking the two concerns the government’s best performing issues. Combined, it is safe to say that the overwhelming majority agree with the government’s fiscally expansionist programme to protect jobs and consumer demand.

The debt figures

Debt is generally public lending by the Maltese government from local sources, such as the sale of bonds. A high rate of debt suggests the country needs from cash to finance a large spending programme.

The problem of debt is compounded if that spending is not creating proper investment that gives the country a return, and therefore revenues to finance that debt.

So what is the picture of the next four years as predicted by the government?

In the COVID-year of 2020, the government spent €4.6 billion in recurrent government spending and just over €1 billion in capital expenditure. With revenues of €4.3 billion, that left a deficit ‘hole’ of €1.4 billion.

Taking that deficit as a percentage of gross domestic product – €13 billion – that amounts to 9.7%, an impressive rate given that EU governments are normally asked to keep deficits below 3% of their GDP. But this was the COVID year, when spending greatly increased due to health requirements, staffing and vaccinations.

So onto 2021 and beyond. This year, the deficit will slightly increase to €1.5 billion, clocking at -11.1% of the GDP – again a reflection of the post-COVID spending spree to keep businesses ticking.

Next year however, the spending deficit is going to be halved to -5.6% (€850,000), an impressive feat in and of itself. The question is how: according to the government, revenues are going to jump from €5 billion to €5.7 billion, while spending will ease off gently. GDP will grow to €15.1 billion.

In 2023, the same rhythm will be retained: higher revenues almost at €6bn, spending kept at similar levels, higher GDP, giving a deficit of €707,000 (-4.4%); and finally in 2024, the deficit is returned to -2.9%, thanks to higher revenues €6.2bn and a higher GDP.

The PN’s criticism is that financing this programme of spending from 2021 onwards is costly: the government’s borrowing needs will be €2 billion in 2021, €1.23bn in 2022, €1.17bn in 2023, and €1bn in 2024 - €5 billion in four years.

But debt is also ‘serviced’ every year: that is, the increased revenues from a functioning economy provide the money to pay back the debt, which in this case averages at around €500,000 each year.

The end result is that Malta’s public debt remains manageable, growing to around just over 62% of GDP in 2024, a far cry from the over-75% levels Malta had when it had just become an EU member state.

Good or bad?

The material impacts of debts and deficits are often positive for consumers. Every government expenditure goes to someone, so running a deficit simply means there’s more money in people’s hands. Debt also has its positive consumer impact as it helps buyers of government bonds through the interest gained.

However, the negative effects of debts and deficits shouldn’t be ignored. Big debt means high interest payments, and large deficits can lead to inflation if the money isn’t spent properly.

At this stage, Malta’s debt level appears to be sustainable. A recent IMF country report stated that Malta’s debt sustainability is resilient to most standard adverse macroeconomic shocks, but remains sensitive to low growth. This makes economic growth all the more critical in keeping the economy afloat over the coming years.

The PN’s fiscally conservative criticism also falls flat in terms of history of economy management: Labour registered the country’s first surplus in decades, going from  0.4% surplus to a -10% deficit in just one year due to COVID.

Criticising government for a pandemic-induced recession comes off as misguided. Even the PN took on €2.6 billion worth of debt over five years between 2005 and 2010 to finance its capital investments.