Euros

The effectiveness of the €70 million worth of stimulus cheques that the Government will give to workers, students and pensioners will be diminished if the money is spent on foreign imports, or not spent at all, according to a local economist.

The scheme, which was announced by Prime Minister Robert Abela and Finance Minister Clyde Caruana last week, will see workers and students receiving €100 for workers, while pensioners and those on social benefits will get €200. The scheme will reach 380,000 people.

“As external demand from tourism remains subdued, the economic recovery will be more dependent on domestic demand, at least during the first months of 2022. By means of this measure, the Government is increasing disposable income, thereby encouraging consumer spending,” said Dr Moira Catania, a lecturer in Economics at the University of Malta’s Institute for European Studies.

Dr Catania added that the measure was ostensibly meant to compensate for the increase in the cost of living, particularly higher food prices, due to the inflationary pressures that are being experienced worldwide.

The measure, however, should not be seen as a magic bullet.

“If the cash transfers are spent on imports, this will also reduce the effectiveness of the measure as its impact on the local economic activity would be limited. Given the higher degree of trade openness of the Maltese economy, this ‘leakage’ in imports is expected to be substantial. In contrast, the voucher scheme targeted the restaurant and hospitality sectors which have a relatively high local benefit,” she said.

“And if the cash handouts are saved, rather than spent, the measure will not be an effective fiscal stimulus. This is more likely to be the case for high-income groups, who have a lower propensity to spend than low-income groups, and possibly also for pensioners. Being a one-off transfer, rather than a permanent increase in income, may also imply that the cash handout is saved rather than spent. This constitutes a disadvantage of this measure compared to the previous two rounds of voucher schemes.”

According to Dr Catania, another downside of the measure is that it represents a substantial increase in Government spending, beyond the budgeted allocations for 2022.

“The impact of the pandemic on Malta’s public finances has been dramatic with a budget deficit of around 10 per cent of GDP in 2020 and expected at around eight per cent of GDP for 2021. Furthermore, the Government debt ratio to GDP has risen rapidly from around 41 per cent in 2019 to around 62 per cent by 2021. Nevertheless, this Government debt level is notably lower than the average for the Euro Area of close to 100 per cent. The fiscal buffers created before the pandemic, through the registered budget surpluses and the consequent decline in the Government debt ratio, provided the Government with the required fiscal space for a forceful response to the economic impact of the pandemic, without jeopardising fiscal sustainability,” she said.

The scheme has been criticised by some, including former Finance Minister Tonio Fenech, who have dismissed it as being a vote-catching ploy in the lead-up to the general election.

“One can argue that this is an election measure, but on the other hand, the fast spread of the Omicron variant was unexpected and thus the economic circumstances have changed considerably from those projected at the time when the Budget for 2022 was being drafted. In view of the prevailing challenges for the Maltese economy, the cash transfers can constitute a legitimate as well as a timely measure to support the economy recovery and safeguard real incomes during the first months of 2022,” Dr Catania said.

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