Artificial energy and food subsidies must change

Sustainable development can be given an economic definition: one that makes a country wealthier, better educated and healthier. If this is the case, why do so many vociferously complain about excessive property development, nepotism, direct orders and their adverse impact on society? These complaints raise a question: does the growth being celebrated improve society as a whole, or are its benefits accompanied by costs that receive far less attention?

Has rapid development rendered Malta more beautiful since Independence? The answer is yes, if development has been a force for sustainable property expansion. The converse is that unsustainable development is harmful and undermines the ecology and quality of life. What matters is whether the changes taking place leave the country a better place in which to live, work and bring up future generations.

The government and others tar NGOs and activists with a broad brush for opposing unsustainable development. It is naïve at best to argue that activists are against growth that betters society as a whole and makes it more prosperous. Their concerns deserve consideration, especially when the consequences of development extend beyond individual projects and affect entire communities.

Our economic model is primarily measured in numbers: cars, pleasure boats, tourists, building permits, hotel rooms, property sales, income, supplements to pensioners, and so on. All are measured in monetary terms, without sufficient accounting for their harmful effects on ecology, air purity, noise pollution and, in some cases, permits to destroy heritage for redevelopment. Yet these effects also carry a cost, even when that cost does not appear immediately in economic statistics.

Sociologists warn us to be cautious. Prosperity should also be assessed through the conditions people experience daily. More economic activity may increase income, but the accompanying pressures on housing, roads and neighbourhoods must form part of the same discussion.

Another headache for future productivity is our low fertility index and ageing population, which both lead, in different ways, to increased immigration of third country nationals (TCNs). In Malta, imported cheap labour is estimated to account for up to one in five of the population. Again, last month, the social services ministry announced that 107,000 families were earning a low income.

Castille’s counterargument is that recognising and utilising the skills and abilities of TCNs enables the business community to fill vacancies more effectively, at lower cost and skill levels. Naturally, unions advocate for fair wages and inclusive employment practices. Filling vacancies is important, but so is ensuring that economic growth translates into better conditions for those whose work sustains it.

Finance Minister Clyde Caruana launched the pre-budget document on 30 September. Energy and food subsidies are projected at about €400 million in 2027. He said fuel, electricity and gas prices would remain subsidised, warning that withdrawing the support would put jobs at risk and lead to a significantly higher cost-of-living adjustment in 2027.

Let us compare data on actual energy subsidies spent across the EU. Finnish and Cypriot policymakers, for instance, have opted for considerably less intervention, with State aid amounting to around 0.6% of their respective output. Similarly, government subsidy policies have varied considerably. Countries such as ours have utilised most of the allocated aid to impose price caps on utility and transport prices, whereas the governments of Austria, Germany and Italy channelled most of the funds as direct aid to households or firms.

The financial effort undertaken by the Maltese government to contain retail energy inflation has been substantial. On the other hand, the fixed energy pricing strategy is likely to have put considerable strain on government finances, with further deterioration of the fiscal space expected in the coming years. The immediate protection offered by subsidies must therefore be considered alongside their longer-term financial consequences.

By not gradually eliminating these blanket energy subsidies, the government has not only hindered Malta’s progress towards its green targets but has also contributed to unwarranted negative balance-of-trade effects. These subsidies reduce the ability of economic agents to react to negative terms-of-trade shocks. There is no accounting for oligarchs and robber barons who fully exploit such subsidies.

On the positive side, all rating agencies have congratulated us on our commercial success. This reads like sweet music to the government, now expecting a galloping GDP exceeding €24 billion, yet with a higher deficit approaching 3% of GDP. Such success still leaves questions about how prosperity is distributed and sustained.

Watch how the Labour Party entered into a social contract with voters last May, replenishing its manifesto with many promises, such as the super €1,000 annual bonus and myriad other benefits. Now, we are warned that such electoral benefits are not all sustainable but may materialise if future generations pull their socks up and join the queue to work harder with AI and robotics. Try to do more with less.