Public debt and fiscal deficits are common terms in Maltese public discourse. A whole generation has known only years of successive public fiscal deficits. For years it was given little importance until Alfred Sant put it as a central theme in 1996 when his newly elected government was faced with a huge imbalance and mounting debt.
Successive governments struggled to address the structural problems that were underpinning the fiscal imbalance. Low rates of economic growth and relatively high interest rates gave rise to a perfect storm. Indeed, Malta was subject to an excessive deficit procedure from July 2009 to December 2012. The procedure was reopened in June 2013, after Malta’s deficit was estimated to have reached 3.3% of GDP in 2012. A 2.6% of GDP deficit had been projected for 2012 when the procedure was closed in December 2012.
2016: First surplus in 32 years
Year 2016 was remarkable in this regard as it was the first year after long decades where a surplus was registered. Something that continued for successive years until the pandemic hit the global economy.
Between 2016 and 2019, Malta’s debt to GDP ratio declined to almost 405 on the back of fiscal surplus and record growth in the national economy. The charts summarise these developments.
Then COVID-19 struck
The coronavirus pandemic has put unprecedented burdens all global economies. In 2020, something that was unthinkable became almost standard: lockdowns. Travel was prohibited or discouraged, and economies were shut down.
In response to the dramatic COVID-19 shock, countries implemented packages of fiscal measures. These packages consist of discretionary fiscal stimulus measures, state guarantees for loans to firms and other liquidity support measures. An important component of the discretionary measures relates to support for firms, in particular to preserve employment.
Countries have also focused on health spending and measures aimed at supporting the unemployed and other vulnerable groups through various social transfers. On the revenue side, deferrals of tax and social security contributions are aimed mainly at providing liquidity support to households and companies. According to the European Commission’s Spring 2020 Economic Forecast, the discretionary fiscal measures amount to 3.25% of GDP at the aggregate euro area level. In addition, state guarantees for loans to firms and other liquidity support measures amount to around 20% of euro area GDP, according to governments’ budgetary plans as outlined in the stability programmes published at the end of April.
Wage Supplement: A life-saver
The Maltese Government was particularly aggressive in providing support. First because of the openness of the Maltese economy – among the most open in the World – and its high dependence of tourism made it very vulnerable to this shock. Without extraordinary support, the national economy would have faced a severe recession. Some reports in the local media at the outset of the pandemic pointed towards unemployment levels reaching 50,000 persons.
Among the most radical of measures adopted by the Maltese government was the Wage Supplement. It might not have saved every single job in the economy, but it was incredibly successful at stopping thousands of people being made redundant. It has also allowed businesses to get back up and run more quickly than in other countries.
The support provided including the wage supplement had a cost. Coupled with the partial shutdown of the economy including the tourism and travel, the fiscal deficit reached 9.7% in 2020 and the debt ratio increased from almost 40% in 2019 to almost 50% in 2020. The figures for 2021 point towards increasing expenditure.
In times like these, it is the Government’s role to step in. It has an almost moral duty to register deficit and increase debt ratio. Increasing demand and preserving the productive capabilities of the economy becomes a must.
Unsurprisingly, this led to criticism levelled at the government, accusing it of being fiscally irresponsible for increasing debt. Although such criticism is to be expected on a political level, unfortunately it comes from people with little knowledge of how economies work.
Such criticism is best described as the Great Man Syndrome, when experts in one field start to develop strong opinions about another field that they know nothing about. We are all lucky that these persons are not in a position to take important decisions on Malta’s economy.