Why is the smallest economy in the Eurozone able to present a Budget that further invests in people without raising taxes or cutting essential services, while much larger European economies are tightening the belt? Germany, for instance, will reduce spending in all areas except defense in an effort to close its €20 billion shortfall in the 2024 Budget. After having recovered from the pandemic, hasn’t the whole of Europe been battered by the economic impact of Russia’s invasion of Ukraine, the resulting energy crisis, and record inflation?
The answer lies in the first part of the speech delivered in parliament by Finance and Employment Minister Clyde Caruana yesterday night, outlining the Government’s financial plans for next year. In plain terms, he explained how Malta has avoided austerity and continued to create wealth and grow its economy, primarily by protecting households and businesses from undue burdens, even amid global turmoil.
Consumer spending is key
Economist Philip von Brockdorff attributes Malta’s continued economic success to strong consumer spending, which has been driven by government policies. In an interview with The Journal, he noted that Malta’s consumption patterns have remained healthy, unlike those of some other EU member states. This trend is expected to continue next year.
“Consumption is spearheading our economic growth,” Prof. Von Brockfdorff points out. “It makes the whole difference. From it, the Government generates revenue from VAT and other taxes. Economic growth leads to an increase in employment, which in turn generates even more revenue from taxes and social security contributions. Obviously, then the Government is in a position to increase benefits across the board, as has been effectively done in this Budget and in previous ones.”
Consumption, and its positive effects, are the primary reason why the country can manage to keep its debt level below the benchmark of 60 per cent debt-to-GDP ratio set by the EU treaties. However, Malta’s budget deficit is currently above the EU’s Maastricht convergence criteria threshold of 3 per cent of GDP, but it is forecast to decline gradually to 3 per cent by 2027. The EU temporarily suspended its Maastricht convergence criteria to allow governments to respond to the COVID-19 pandemic. In light of the economic fallout from the war in Ukraine, it subsequently extended the suspension of the Maastricht convergence criteria to 2024.
Consumption vs inflation
Is it not surprising that consumption in Malta is holding up despite an inflation rate of 5.7 per cent, driven primarily by higher food and service prices?
Economist Philip von Brockdorff attributes Malta’s strong consumption trend to changes in Maltese culture and attitudes over time, noting that most consumption takes place in the food sector: “Years ago, saving money for a rainy day was a virtue that our society promoted, but nowadays we are much more oriented towards consumption. Furthermore, there has been an exponential growth in Malta’s population, and that has helped push consumption up as well.”
The Government’s steady support to keep energy and fuel prices stable despite external pressures – for 2024 a staggering €350 million have been allocated for this purpose – has also contributed to sustaining consumption. Without this support, the inflation rate would, of course, be much higher.
“If the subsidies were not there for everyone, people would have had to fork out much more money to foot their utility bills and to fill up their vehicles,” says von Brockdorff. “That would negatively affect their level of consumption.”
Will this go on forever?
“What would happen if consumption levels dwindle?” we ask von Brockdorff.
“Well, the country’s economic growth would slow down. If the economy fails to grow by 3 or 3.5 per cent annually, revenue from taxes and social security contributions will decrease. That would lead to fiscal problems, with Governmnent no longer being in a position to sustain the current level of social benefits and its investment in health, education, law and oreder, and many other sectors.”
Is there no other way for the country to achieve its economic goals besides continuing with the same economic model it has been using for the past decade?
“Changing our economic model isn’t easy at all. Malta’s current economic system is generating a certain amount of revenue, which in turn fuels growth. An alternative to it would need to ensure that the State continues to maintain the same revenue levels. If that is no longer the case, what would the way forward be? Increasing the country’s debt? Increasing taxation? Cutting back benefits and essential services? That is the big dilemma.”
Photo credit: Oleksandr P