The 2023 Budget seems to have come at the perfect time for Malta. The Maltese economy has lately been characterised by uncertainty, primarily due to the pandemic outbreak and the repercussions that followed. In early 2022, as global economies were gearing up to recover from lockdown losses and retain pre-pandemic trends, the Russian invasion of Ukraine caused unforeseen distress, delaying the projected economic revival. Malta does not operate in a vacuum, and even though employment levels have remained relatively consistent throughout this turbulent period, inflationary pressures have blurred business expectations.
Due to rising costs and increased wage demands in the private sector, businesses are under pressure from two directions. The tight Maltese labour market has increased wage bargaining power for workers. In the meantime, the high trade openness in the Maltese economy, coupled with the volatile and ever-increasing cost of raw materials, has led to shrinking profit margins. The interaction of a volatile aggregate supply with constant revisions in inflationary expectations has generated the possibility of a wage-price spiral. The latter term refers to a vicious cycle where workers demand frequent upward reviews of their wages due to increasing inflation, such that employers continue to offset higher labour costs by raising their prices. In addition, in light of the surge in COLA, policymakers need to bear in mind the repercussions of forced wage increases on the long-term external competitiveness of the private sector.
The Keynesian theory of injections suggests that policymakers could increase aggregate demand by a combination of higher fiscal spending, lower taxation, improved private sector investment and higher exports. However, given the current economic situation, boosting demand might not be the optimal alternative, given the already overheated price growth. In fact, when looking back at historic periods which were characterised by rising cost of living and economic uncertainty, one notices that in the 1980s, then U.S. President Ronal Reagan had attempted to stabilise the economy by reducing fiscal spending and money supply growth while simultaneously decreasing tax rates on income from labour and capital.
Moreover, the government is currently limited in its spending capacity due to the unprecedented rise in fiscal debt during the pandemic, as well as the immediate need to redeploy the hundreds of Air Malta employees. In fact, government debt as a percentage of GDP has risen from 41 per cent in 2019 to 57 per cent in 2021, edging closer to the ECB’s 60 per cent benchmark. Other than increased fiscal deficits, the recent aggressive interest rate hikes will continue to raise the cost of public debt. At a Times of Malta pre-budget event, Finance Minister Clyde Caruana hinted that improved tax revenue would be able to boost government finances after revealing that only 35–40 per cent of businesses in 2019 declared a profit. In addition, Caruana also suggested that even though the government will be economising on some of its spending, the allocated expenditure for health care and pensions will not be altered.
Furthermore, volatility in global energy prices is posing a serious threat to the Maltese economy. Caruana recently announced that without government subsidies, utility bills would be around 140 per cent higher for Maltese households. Thus, given that it is unlikely that energy prices will revert to their previous levels in the foreseeable future, the 2023 Budget should also consider the high energy costs and the associated electricity and fuel price subsidies currently funded by public finances.
In summary, the 2023 Budget should tackle challenges relating to the energy crisis and the associated inflationary pressures that have clouded the future economic outlook, while preventing a wage-price spiral. This can be done by setting up an adequate framework which improves the skill set of the Maltese workforce while simultaneously establishing a recruitment process that retains the supply of efficient foreign labour. Ultimately, given that most investment decisions are based on foreseeable expectations, it is imperative that the 2023 Budget is able to convey a message of stability and clarity about the likely economic trajectory of the year ahead.
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Since May, the seat load factor for airlines operating to and from Malta was consistently superior to 2019