Beyond the austerity straitjacket

Unfortunately, a core group of bureaucrats at the European Commission remain wedded to the myth of fiscal austerity. One hopes that, in the discussions on the EU’s new fiscal rules, this approach will lose out to a more flexible and progressive one.

After having gone through the increase in expenditure implied by the draft budgetary plans submitted by the European Union’s Member States in early October, the European Commission issued letters to a number of countries to inform them that they were not conforming to the Council recommendations on government expenditure growth. Now, it has published its complete assessment of all draft budgetary plans.

While some have tried to spin that the Commission has given a thumbs down to Malta’s Budget for 2024, in reality the assessment indicates that the Maltese government’s fiscal situation is broadly in line with the recommendations of the European Commission. While the deficit is above 3%, the national debt is below 60%, and moreover the Commission believes the Maltese Government’s plan to gradually reduce the deficit to 3% is feasible.

However, there is one big bone of contention. The European Commission does not agree with the Maltese government’s decision to ignore its recommendation to immediately remove the measures that are keeping energy prices stable for households and for firms. On the one hand, the Maltese government considers this decision as a strategic one that underpins the positive economic results that our country is experiencing, such as the highest rate of economic growth and the lowest rate of unemployment across the European Union.

On the other hand, the European Commission is adamant that subsidies should be removed immediately and that consumers should face the music. Low energy prices are seen as a distortion of market forces that is harming competition amongst firms. Moreover the Commission believes that funds saved from lowering assistance can be used to reduce the deficit.

Yet, in its report, while the Commission notes that the majority of countries are withdrawing assistance on energy prices, it recognises that instead they are ending up spending these funds on other Government outlays. This indicates how unwise this policy is, because there is still no improvement in the fiscal situation after the removal of these subsidies. The money is just spent in a different way, mostly because the economy ends up underperforming.

The current Labour administration has repeatedly stated that it believes that there can be no economic and social progress without stability in energy prices. The path chosen by the Government is not to force these burdens on families and businesses, but to rather to invest in energy generation. The strategy is that this investment will lower the unit cost of production to the extent that there will no longer be the need for direct support to cover energy production costs. Amongst the investments that are being carried out, one can list the construction of the second interconnector, the waste-to-energy plant, and renewable energy projects in the exclusive economic zone.

Towards a more flexible and progressive approach

Despite the fact that the rules of the EU’s Stability and Growth Pact are currently still suspended, last July the European Commission made three recommendations to Member States. First, the Commission said that support to keep energy prices low should be removed from this year, as soon as possible. Secondly, it argued each country should preserve the amount of public investment financed by local funding. Thirdly, it required every country to implement its Recovery and Resilience plan. Apart from this, each country was given a quantitative guideline on how much it should increase Government expenditure.

In this regard the Commission concluded that Belgium, Finland, France, and Croatia did not follow its recommendation on the growth rate of spending, and these countries need to revise their budgetary plans accordingly.

By contrast, the Commission’s report states that “net expenditure is projected in line with the recommended maximum for Austria, Germany, Greece, Spain, Malta, and Slovenia”. Once again, this shows how misguided the Opposition in Malta is when it says that Government spending is out of control. The reality is that, according to the European Commission, public expenditure is being managed properly or, to quote it directly, “in line with what was recommended by the Council”.

The governments of Italy, Latvia, and the Netherlands have also been asked by the Commission to take corrective action because it does not agree with the plans they submitted. As for Luxembourg and Slovakia, the Commission ordered them to submit a completely new plan that would be in line with its fiscal recommendations.

When it comes to public investment, the Commission observes how the situation in Malta is in line with its recommendations. While the Nationalist Opposition argues that the Government is reducing public investment, the Commission says that  “according to the Commission 2023 autumn forecast, nationally financed public investment is projected to increase to 2.9% of GDP in 2024”. This is exacty the opposite of what the Oppositon has been arguing.

Malta, like Germany and Portugal, was singled out by the Commission for having chosen to ignore the recommendation to remove aid to families and businesses this year, although it is only Malta that will not reduce the support even by a cent, as the other countries have opted to reduce it gradually. Yet, the Commission’s analysis shows that the fiscal situation of the Maltese government will still be improving, even though the Government will be keeping public investment high and will not make any reduction in support to families and businesses.

Unfortunately, a core group of bureaucrats at the European Commission remain wedded to the myth of fiscal austerity. While they may not be as steadfast adherents to this ideology as they were during the financial crisis of 2008, they still lean towards this line of thinking. One hopes that, in the discussions on the EU’s new fiscal rules, this approach will lose out to a more flexible and progressive one that would allow European countries achieve the digital and green transformations in a just way that does not harm families and businesses.

Photo credit: Karolina Grabowska

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