Public debt needs to be viewed in relation to the size of the Maltese economy. The current debt of around €10 billion might still be sustainable unless there is a slowdown in economic growth, a reality confirmed this month by the Central Bank which is projecting a slowdown of 3.5% in 2025 and 2026. But now, Malta will be forced to face an excessive deficit procedure.
At the end of 2020, the general government debt level stood at almost €7 billion, going up to just under €10 billion up to last April. At €9.93 billion, the increase in a year was €764 million when compared to 2023.
A good portion of this increase in debt might have been the more than justifiable Government support during the coronavirus pandemic. But although it has already been two years since the end of the pandemic, this national debt keeps spiralling upwards and no one seemed to want to talk about it.
That was until last month when the European Commission recommended an excessive deficit procedure with the winding down of energy support.
It was bound to happen sooner or later. The increasing level of debt is unsustainable for the long-term prospects of the Maltese economy especially when much of this increase is due to what is being described as ‘wasteful expenditure’.
Are we in time to address this increasing debt spiral? Is there willingness to take a few difficult short-term decisions for a more stable long-term future? Is this increasing level of debt in any way affecting Malta’s attractiveness in terms of foreign investment?
“Yes we are still in time to address this issue and we can avoid denting economic growth only if the appropriate measures are taken,” says economist Lawrence Zammit.
“One way of doing it is by understanding fully the cost-effectiveness of our public expenditure and then, by addressing those elements of public expenditure which are contributing little to our economy and eliminating the reason for such an expenditure.”
“But while public debt does not affect Malta’s attractiveness in terms of foreign investment, we should ask ourselves if our economy is overheating and whether the significant presence of third-country nationals in Malta is being a net contributor to the country or not – two factors that may harm the country’s attractiveness,” said Mr Zammit.
Silvan Mifsud, Economist, Council member and Chair of the Family Business Committee at the Malta Chamber explains that public debt needs to be viewed in relation to the size of the Maltese economy and that although government debt has gone up, the debt-to-GDP ratio has gone from 52.2% in 2020 to 50.4% in 2023.
“The risk we run is if our economic growth falters. Annual public deficits are projected to keep hovering between €800m and €900m according to the last budget estimates so, for such public deficits to remain sustainable we need high economic growth otherwise our annual deficit to GDP ratio and our total public debt to GDP ratio will go haywire.”
However, figures released this month by the Central Bank show that while Malta’s GDP is expected to grow to 4.3% this year, the rate of growth is expected to slow down to 3.5% next year and in 2026.
Mr Mifsud noted how the country continues to depend on foreign labour to achieve higher economic growth and that this is straining infrastructure and raising government costs.
“Why do we keep assuming that all this is still sustainable? Are we planning for when this cannot keep going on? Urgent reforms are needed now because we have been postponing for way too long. The economy cannot keep growing by injecting 10,000 to 20,000 foreign workers every year.”
According to Mr Mifsud, the priority is to increase the value-added and productivity of every person in Malta’s economy and to focus our economic strategy by promoting growth in those areas that are less labour-intensive and that generate higher value-added to ensure healthy economic growth without further stressing our infrastructure.
“The other focus should be to curb government spending. A new economic growth model that puts less stress on the infrastructure can be such that it would require less government spending. A solid financial system with a sustainable level of government debt will be a positive consideration for those who decide to invest in Malta or elsewhere. But investors will consider Malta if its future economic growth model is a sustainable one and right now, it is not,” warned Mr Mifsud.
According to Jordan Portelli, Chief Investment Officer at Calamatta Cuschieri Moneybase, debt levels remain an important ingredient for an economy to grow.
“Firstly, it is important to note that the higher levels of debt are also a consequence of an unprecedented pandemic when debt levels increased everywhere and governments had to roll out large and much-needed emergency support packages.”
“Having said that, it is also important to note how in Malta’s growth trajectory over the past two decades, the increase in debt also played an important element in Malta’s exponential economic growth. However, there is an inflection point that needs to be monitored and such growing debt levels need surveillance.”
“We are still experiencing growth, which gives us the advantage to plan a clear strategy for a more sustainable economy. However, it is now time for measured decisive actions to lower the country’s debt levels. Continued growth in the level of debt will increase scrutiny which will inevitably pile pressure on possibly also the cost of financing for the government, and possibly hinder prospective foreign investment.”
“To date, Malta’s economy proved to be in a better place and continues to grow at a faster pace than our peers. But now, we need a fiscal policy that balances sustainable growth by ensuring that the main pillars of the economy remain resilient as much as possible in times of volatility, and sound over the long term,” concluded Mr Portelli.
| Proposals – Reduce funding for non-performing public entities; – Consolidation of the public sector through a stop on new intakes, a freeze on wages, and early voluntary retirement schemes to reduce redundancy and achieve higher economies of scale; – Allocate funds based on performance metrics and outcomes rather than historical spending so that only effective programs continue receiving funding; – Limit subsidies on water and electricity to the lowest-income tier; – Limit children’s allowance to lowest-income earners; – Limit free public transport only to Maltese students, Maltese low-income earners and Maltese pensioners; – Address the long-term sustainability of free national healthcare and pensions; – Curb ‘wasteful’ excessive expenditure related to public events; – Ensure serious accountability and improvement of reporting on public procurement; – Restrict current spending on capital projects through more public-private partnerships; – Impose substantive limits on capital expenditures whose value does not exceed a pre-specified percentage of GDP. |
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