When discussing the state of public finances, we have grown used to consider two indicators: the deficit and the debt ratio. The first shows the difference between revenues and expenditure in one year, while the second compares the national debt with the country’s GDP. These two indicators are the key measures used by the European Commission to assess national fiscal policies and form the bedrock of the Maastricht criteria.
However, in recent years, Eurostat has developed a more comprehensive measure with which to assess government finances. This indicator, known as net financial worth, is the difference between the stock of financial assets owned by a government and the stock of liabilities it owes. The advantage that this indicator has on a measure like the debt burden is that it takes into account any financial assets that Government could use to pay of the debt, while it also includes other financial obligations that Government may have accrued.
To give a simple example from a local perspective, in pre-pandemic years when the Maltese Government was running a surplus, it still continued to issue bonds, particularly pensioner saving bonds, even though it did not really require the extra money. The latter was then deposited in the sovereign wealth fund or simply ended up as deposits with the Central Bank or with other local banks.
Even during the pandemic, Government continued to accumulate bank deposits. Before the pandemic struck,Government’s bank deposits amounted €530 million, while they now stand at nearly €665 million. Thus nearly €150 million of the government debt issued during this period was not actually spent but was instead put aside.
The Maltese government’s debt ratio at the end of the first quarter of 2021 stood at 59% of GDP, up from 43% a year earlier. Despite this rise, Malta’s debt ratio was the sixth lowest in the Euro area, losing just one place since the beginning of the pandemic. The increase for Malta, 16%, was only slightly higher than that in the Euro area, 14%. Moreover, the Euro area’s debt ratio, at nearly 101%, remained far higher than of Malta.
When one considers net financial worth, the situation for Malta is even better. While our debt ratio is 59%, our net financial worth is -43% of GDP. This suggests that the Government has financial assets that would pay off the equivalent of 16% of GDP of our national debt. This means that more than a quarter of the national debt is backed up by net financial assets. This is a higher proportion than for the rest of the Euro area, indicating that our government is cash-rich compared to others in the Monetary Union.
Another interesting statistic that emerges from Eurostat data is that while the debt ratio for Malta worsened by 16% of GDP, the government’s net financial worth worsened by 14%. This confirms that part of the rise in the national debt was not due to increased deficits, but was rather to buttress the financial liquidity of government as a precaution against unforeseen circumstances.
Despite the substantial fiscal injection made by Government that resulted in our unemployment rate remaining virtually unchanged, Government’s net financial worth in the first quarter of 2021 was better than the -48% of GDP bequeathed by the preceding administration. In fact, it was only after the last quarter of 2016, the time when Malta registered the first fiscal surplus in 35 years, that Government’s net financial worth was better than what it is now. Therefore, the pandemic has so far set back Government finances to what they were five years ago.
Given the sharp economic rebound that is being forecast, the fiscal situation will gradually improve. By 2023, the debt ratio should rise to 66%, and then start dropping again as from 2024. Thus, in all likelihood, Government’s net financial worth will always remain better than it was before 2013. This is quite reassuring that in the rest of the Euro area, net financial worth is over 10% of GDP worse than it was in 2013.
It is hard facts such as these that are leading rating agencies to maintain Malta’s high credit rating. This is why the IMF has argued that once the pandemic is over, Malta’s government should focus on rebuilding fiscal buffers. Fiscal buffers have proven to be a godsend that has helped Malta withstand an unprecedented economic shock and rebound immediately. It is therefore essential that they be rebuild in case of other future emergencies.