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Subsidies to remain but cannot last forever, Caruana warns ahead of Budget 2024

Finance minister Clyde Caruana on Wednesday warned that while subsidies on energy, fuel and food are set to continue into next year, the mentality that government can continue to spend indefinitely needs to change.

Speaking at a pre-budget consultation meeting with social partners, Caruana said that the country needs to be weaned off the psychological effect brought about through the financial aid provided by government first during the pandemic and later to ease inflation.

"Now we are back to reality, where we can spend what we earn. You can spend a little more than you earn for a little while, but you cannot do that forever."

This comes in light of the European Commission's push for its member states, including Malta, to phase out subsidies.

In total, Caruana said, the government will be spending €350m in subsidies next year, some 1.7% of its total GDP.

Praising the government's "bold" decision to subsidise energy costs, Caruana said that if they were to be removed petrol prices would increase by 45 cents per litre and people's electricity bills would increase "substantially".

"Government wants to continue helping with these measures, but we cannot do this for years on end. This is why we need to look at investing heavily in alternative energy sources."

Malta's economic health 'very strong' but inflation will persist

Delivering an expansive outline of Malta's financial situation, Caruana said Malta is set to remain in a "very strong" position, with increases in government revenue, a lowering rate of deficit, and debt rates that are gradually decreasing.

Although inflation is expected to slow down over the next few years, this is expected to remain above the levels the country has been used to for decades.

Saying that these levels of inflation have not been seen across Europe since the 1970s, Caruana quipped that whereas people always used to complain that COLA levels used to be too low, now they are surprised that they are so high. 

He also confirmed that the cost of living adjustment will be higher than last year's record €9, although he did not confirm it could be as high as €13, as reported in the media, saying that the final figure is still being calculated. 

Malta's 5% annual inflation for last year, he said, was slightly below the EU average of 5.9%. This is set to balloon to 6.1% in 2023, before shrinking to to 3.7% in 2024 and eventually reach the EU's target of 2% in 2025.

Caruana admitted that inflation has led some to increase prices with little justification.

"The element of profiteering exists in Malta too, where people increase prices with the excuse of inflation. This exists all over Europe and Malta is no exception."

Parliamentary secretary Andy Ellul. Photo: Jonathan BorgParliamentary secretary Andy Ellul. Photo: Jonathan Borg

Malta's economy 'not yet mature'

Caruana claimed that while the global economy is set to only grow by 1% in 2023 and 1.7%, this is dwarfed by Malta's projected growth of 3.9% and 4.1% respectively. 

This, Caruana says, reflects the fact that Malta's economy is not yet mature and still has ample room for growth, unlike several other established economies around Europe.

Adopting an analogy from his days as a university lecturer to illustrate his point, Caruana said "think of a student who always gets a 90% grade in their exam. They can only improve their grade by a few marks. On the other hand, a student who usually receives a 70% grade can increase their grade much more drastically".

Debt and deficit need to shrink, 'but in a gradual way'

Describing debt and deficit as the most important measures of all, Caruana hit out at calls for drastic action to be taken to reduce debt. This, Caruana argued, would create more unnecessary shocks to an economy that is still reeling from the effects of the pandemic and the Ukraine war.

Malta's deficit, which soared to a high of 9.7% during the pandemic has been on a slow decrease, reaching 5% this year. It is expected to further shrink to 4.5% in 2024, inching towards the government's target of 3%.

Likewise, Caruana argued, Malta's debt-to-GDP ratio of 53.6% remains below the widely accepted threshold of 60%, as established in the Maastricht Treaty, and significantly lower than the EU average of 83.7%.

"Deficit needs to continue to decrease, but in a gradual way. The economy does not need another shock."

'No shocks to the system' when limiting foreign workers

Asked about a proposal floated by the Malta Chamber of Commerce for a cap on the percentage of non-EU nationals that a business can employ, Caruana said that while there are several administrative, economic and financial means to address this issue, any decisions need to be taken with caution.

"There are different opinions on the issue amongst social partners. One needs to see that any measure does not have a negative impact on Malta's labour market. The common thread among all partners was to do the things that need to be done, without any shocks that the economy does not need."

Nevertheless, Caruana reiterated the belief that Malta's economic model needs to change to one where "wealth is generated by making the engine stronger, not bigger".

Clyde Caruana addressing journalists. Video: Jonathan Borg

Caruana also brushed aside suggestions of a wealth tax, saying that whilst these discussions are interesting on a conceptual level, we need to be careful not to automatically copy measures taken elsewhere because "what applies elsewhere does not automatically apply to Malta in the same way".

More 'sobriety' needed when discussing economy

More broadly, Caruana called for more "sobriety" when discussing the country's finances, underlining the need for "responsibility" in managing Malta's resources.

"I have the moral and political obligation to ensure that Malta’s finances are managed in the most responsible way, even if this does not make me the most popular person in the world. If not, people will suffer, especially the most vulnerable".