Is public debt growing out of control?

The reason why the debt burden has, since 2019, increased in nearly all EU countries is that, first because of Covid and then because of the energy crisis, governments had to sustain businesses and households in an unprecedented fashion.

Before the 2013 general election, the Nationalist Party argued that, if Labour were voted into power, the country would end up requiring a financial bailout from the European Union. This was quite a strong claim, given that the Nationalist administration held the record across EU governments of being the only one to have been placed three times under the excessive deficit procedure by the European Commission.

Contrary to what the Nationalists had predicted, between 2012 and 2019 Malta’s fiscal performance improved dramatically. This was so much so that the public debt as a percentage of GDP – the standard measure of public indebtedness – fell from nearly 67% to 40%. This decline, of some 27 percentage points, was nearly four times larger than that observed across the Euro area, where the debt burden fell from 91% to 84%.

The Opposition tries to deviate attention from this by focusing attention on how much the national debt is in euro terms, saying that the State today owes much more than it did in 2012. This argument shows a complete ignorance of basic financial literacy. The burden of debt is not determined by the debt in absolute terms but by how it compares with the income that can be used to repay it. In simple terms, if I borrow €100,000 and I earn just €10,000 a year, I am in a much worse position than someone who borrows €200,000 but earns €50,000 a year. That is why the public debt is always compared to the size of the economy, as this is what determines how easily this debt can be repaid.

Public debt as % of GDP

201220192022
Greece162.0180.6171.3
Italy126.5134.1144.4
Portugal129116.6113.9
Spain90.098.2113.2
France90.697.4111.6
Belgium104.897.6105.1
EURO AREA91.084.091.5
Cyprus80.190.886.5
Austria81.970.678.4
Finland57.764.973.0
Slovenia53.665.469.9
Croatia69.271.068.4
Germany80.759.666.3
Slovakia51.748.057.8
MALTA66.640.353.4
Netherlands66.248.551.0
Ireland119.657.044.7
Latvia42.436.540.8
Lithuania39.735.838.4
Luxembourg20.922.424.6
Estonia9.88.518.4
Source: Eurostat

Recently the Nationalist Opposition has tried to focus attention on the rising debt burden to argue that Labour has become wasteful. To further colour their narrative, they attribute this rise to corruption and spending on favours to those in the innermost circle of power.

Now, while the public debt burden has increased compared to 2019, to argue that Malta is alone in this trend is completely wrong. Eurostat data, shown in the table, indicate that between 2019 and 2022 the debt burden across the euro area has risen from 84% to 91.5%. As a result, the debt burden is now slightly higher than it was in 2012 in the Euro area as a whole. Not so in Malta, where the debt burden, at 53.4%, is well below the 66.6% that Labour had inherited when it took office in 2013. There are only four countries which have seen a sharper decline in the debt burden over the last decade compared to that seen in Malta. Malta’s relative position compared to the average has, in fact, improved greatly. The country has the seventh lowest debt burden in the Euro area.

Reasons why the debt burden increased

The reason why the debt burden has, since 2019, increased in nearly all EU countries is that, first because of Covid and then because of the energy crisis, governments had to sustain businesses and households in an unprecedented fashion.

A recent study by the Central Bank of Malta explains this in a lot of detail. Between 2020 and 2022, Malta’s government provided support equivalent to 11.5% of GDP in relation to measures related to Covid. The main support was the wage supplement, but there was also an extraordinary rise in health spending (e.g. the purchasing of vaccines). This was followed by measures undertaken to mitigate the impact of the energy crisis, such as the freezing of fuel and electricity prices. These are estimated to have cost some 3% of GDP in 2021 and 2022. Summing these two sets of support one gets a total of 14.5% of GDP in assistance.

Malta’s debt burden rose by 13.1% of GDP between 2019 and 2022, which is slightly less than the total amount of support provided in relation to Covid and the energy crisis. This means that the entire rise in the debt burden was to finance these two essential programmes. The relative generosity of this support was such that, compared to Europe, the debt burden in Malta is rising a bit more sharply. However this is a small price to pay when one considers that, as a result, economic growth in Malta has remained very elevated, unemployment fell to new record lows, while the proportion of those at-risk-of-poverty has declined.

Photo credit: Efrem Efre

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