Malta’s fiscal stance crucial during COVID – Central Bank

A recent study published by the Central Bank has tried to assess Malta’s public finances through the COVID-19 pandemic. It concludes that “the aggressive countercyclical policy safeguarded thousands of jobs, facilitated liquidity access to businesses and protected the most vulnerable households”. It also noted that Government’s approach “helped to limit the decline in economy activity”, while remarking that this fiscal stance “is in line with the guidance expressed by the European Commission”.

Reviewing fiscal policy before the pandemic, the study notes that “on average during the 2012 and 2019 period, the headline balance-to-GDP ratio improved by 0.4% each year”. The burden of taxation fell as GDP grew faster than the increase in Government revenue. However, revenue growth was faster than the rise in expenditure. Consequently, while in 2012 Government spending amounted to 42% of GDP, by 2019 it had converged to 36%, even though capital expenditure’s share rose.

The burden of taxation fell as GDP grew faster than the increase in Government revenue.

On the other hand, lower dependence on social benefits made this item of expenditure become much less burdensome. As a result, the debt-to-GDP ratio fell by over one-third, so much so that “the share of public debt in GDP as at end 2019 was at its lowest level in over two decades”. This meant that “at the onset of the pandemic Malta had more available fiscal space when compared to the euro area”.

This space was put to good use during the pandemic with the authors finding that the fiscal measures that were undertaken amounted to some 5% of GDP. Across the euro area the direct budgetary impact of government measures was just 4% of GDP, one fifth less than in Malta.

Malta’s health spending related to COVID-19 was more than double that in the rest of the monetary union. Moreover, Malta’s wage supplement scheme was much more generous than that in other countries such as Germany.

Central Bank study defies Opposition criticism

While the Opposition argues that the deterioration in public finances in 2020 was due to waste and over-spending, the Central Bank study shows a very different picture. Half of the deterioration was due to the extraordinary measures introduced because of the pandemic. At the same time the reduction in economic activity due to COVID-19 resulted in lower revenue and higher social expenditure. This cyclical impact explains another third of the deterioration in public finances. This means that just one sixth of the worsening of public finances was not directly due to the pandemic.

The authors note that of this component a third was due to higher capital investment, mostly new roads, – hardly something that can be dismissed as waste. The other explanatory factors mentioned in the Central Bank study are “the extension of school transport to households, additional outlays to cancer treatment and higher compensation of employees outside the health sector.”

The measures undertaken in 2020 “rendered possible by the fiscal buffers built due to the countercyclical policies in the last few years prior to the pandemic” are estimated to have boosted GDP by nearly 3%.

This conclusion was not only reached by the Central Bank of Malta. The IMF, European Commission, and at least 4 different rating agencies have reached similar conclusions.

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