From time to time, political discourse starts revolving around the country’s debt levels and its sustainability. Some, in today’s political class seem to be thinking that this topic can be flogged around cheaply to gain some political capital of sorts.
I think this is a serious topic because the country’s ability to raise debt when needed is critical for Malta’s long-term prosperity.
It’s an issue which should never be politicised – a subject which merits fairness and objectivity.
A country’s debt is measured by its ability to repay it back
First off, government debt is never measured on its monetary value but rather on the country’s ability to repay that debt. This applies to national debt as much as an individual’s own borrowings.
That is the reason why the first question asked by a bank manager whenever anyone requests a mortgage relates to that person’s level of income. This is because the income of a borrower is directly related to his ability to repay back his dues. That is also why banks grant loans in different amounts to different individuals according to their respective salaries.
Similarly, governments with different economic prospects can borrow money according to their ability to repay it back. Since countries earn no salary of course, the debt of any given economy is measured relative to the size of wealth it creates; its gross domestic product (GDP).
This is what we call the debt to GDP ratio.
If one fails to grasp this basic concept, one could end-up in an absurd situation trying to justify that Germany – the strongest economic power in Europe – is amongst the most indebted than Greece – the country which was bailed-out by Germany and the rest of the EU some few years back.
Malta’s debt to GDP is amongst the lowest in the Euro Zone
At circa 60% of GDP, Malta presently ranks amongst the top seven countries with the lowest debt ratio in the entire Eurozone.
This is despite the unparalleled level of investment that the Maltese government injected in the local economy to protect businesses and support employment throughout the pandemic.
This compares very favourable with the Eurozone’s average debt ratio which today stands at 102%.
In fact, Malta’s debt is today 40% lower than that of the eurozone, twice as far from the European average compared to Malta’s position 10 years ago.
Malta’s economic growth was critical for the unprecedented improvement in fiscal space
This all boils down to the fact that Malta’s economic growth between 2013 and 2019 coupled with a very prudent management of its public finances resulted in the highest reduction of the country’s debt ratio in our history.
The improvement of almost 30% in the sustainability of the country’s national debt – what economists like to call the ‘fiscal space’ – was amongst the highest across the entire EU. Indeed, Malta’s improvement in its ability to borrow money was only second to Ireland’s.
Malta: The only country with a lower debt ratio compared to 10 years ago
The pandemic had an obvious impact on all countries’ public finances. With a total shut-down of all economic operators, governments had really no option but to run deficits in the short-term to protect the long-term prospects of jobs and economic well-being.
Today every single country in the Eurozone, except for Malta, is running a debt ratio which is higher than the average level of debt carried by these countries 10 years ago.
In essence, in terms of government debt, the pandemic sent the entire eurozone – except for Malta – backwards 10 years and beyond. The average level of additional debt compared to ten years ago in the Eurozone exceeds 33% whilst Malta is still 5% below this threshold.
Stay prudent, focus on sustainable growth
Rather than fomenting unnecessary doubts on Malta’s ability to handle its sovereign debt, politicians should focus on the growth support initiatives whilst ensuring a continuation of the prudential fiscal policy.
It was this financial policy which led to Malta’s best improvement in its debt burden since independence.
It was this policy which made it possible for Malta to handle the worst economic crisis ever in such a way that today we have the highest level of employment in a country geared for a strong economic recovery.