ANALYSIS: Decomposing the largest financial assistance ever granted to families and businesses

In 2020 Malta recorded its largest deficit in history. At €1,300 million it amounted to 10.1% of GDP. By contrast, in 2019 it ran a surplus of €50 million, or 0.4% of GDP. But in a year of considerable challenges, how did the Government counter this abrupt shock on its economy?

On the one hand, Government revenue fell from 37.2% of GDP to 36.5%. On the other, expenditure surged from 36.8% to 46.6%. The latter was driven by two main elements, a three-fold rise in subsidies (from €195 million to €643 million), together with an increase of 25% in Government purchases (mostly relating to health equipment, tests, and vaccines).

TheJournal.mt analyses how the Government tackled the pandemic from an economic point of view:

Immediate €1.8 billion shot

Last September, as part of the Public Service Week, the Government issued an interesting review of economic measures launched in 2020.

The first two packages were launched on the 14th and 18th March 2020, just a few days after the first COVID-19 cases were recorded. Taken together they meant an injection of €1.8 billion thanks to measures such as deferral of taxes, the launch of several additional social services, quarantine leave and assistance for teleworking, and the introduction of Government-guaranteed virtually interest-free new loans.

New Social Pact

On March 24, a new social pact was reached between Government, unions and employer associations, leading to the establishment of the wage supplement. The latter ended up subsidising the wages of around one half of all private sector workers, at an average cost to the Treasury that was equivalent to the cost of the two-thirds pension scheme – previously the most expensive single Government spending programme. It is no surprise that the moment Malta Enterprise started disbursing assistance, the post-COVID rise in the number of unemployed stopped accelerating and started to moderate from 500 per week to around 200.

Providing liquidity

The fourth package of assistance focused on providing liquidity. On April 13, 2020, an order to financial institutions was launched, to issue a moratorium on existing loans. Firms and households affected by COVID-19 could postpone payments in respect of loans at no cost to them. By the end of April, one in ten households with a loan were already benefitting, while thousands of firms, including nearly half of accommodation and food services firms, were given this important support. Then on April 16, the Malta Development Bank announced the issue of multi-million Government-guaranteed, virtually interest-free loans.

Economic regeneration

On June 8, an Economic Regeneration Plan of €900 million was launched. Besides further extension of tax deferrals and the wage supplement, the plan includes three pillars. The first was a package of business assistance, including rent and electricity subsidies, financial support for skills development, business re-engineering, reduced port charges and lower fuel prices. The second was a set of measures to spur consumption, including vouchers, reduced stamp duty and better in-work benefits. The third was a post-COVID strategy, including the largest ever plan of industrial infrastructure investment.

A boost of 5% on Malta’s GDP

These measures taken together were estimated to have boosted Malta’s GDP in 2020 by 5%. About 2% of this was due to the wage supplement, moratorium, and tax deferrals. The economic regeneration plan accounted for the rest, with 1.6% due to the vouchers and business assistance schemes. The September study had indicated that the economic impact of this assistance on some sectors, such as hotels and restaurants, was about twice as strong, replacing a tenth of pre-pandemic value added.

Malta’s GDP fell by 7% in 2020. Which means that in the absence of Government support, Malta’s GDP would have fallen by 12%. That would have placed Malta’s GDP drop not at the EU average as actually happened, but rather just above that of Spain, the worst affected country, where employment fell by more than the whole of Malta’s population, wiping away three years of job creation.

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