Crunch time

Last Updated on Thursday, 27 June, 2024 at 2:36 pm by Andre Camilleri

The conclusion of the report issued by the EU commission on 19 June entitled Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union says that “In the light of this assessment, and after considering the opinion of the Economic and Financial Committee as established under article 126(4) TFEU, the Commission intends to propose in July to open excessive deficit procedures, by proposing to the Council to adopt a Decision under Article 126(6) establishing the existence of an excessive deficit, for Belgium, France, Italy, Hungary, Malta, Poland and Slovakia”.

The rationale leading to this decision is well outlined in this report.

Prior to the above conclusion, when assessing Malta’s public debt situation, this same report says “Based on the Commission’s estimates, the fiscal stance is projected to be contractionary, by 1.3% of GDP, in 2024. According to the Commission Spring 2024 Forecast, Malta’s net nationally financed primary expenditure is projected to increase by 5.5% in 2024, which is below the recommended maximum growth rate. However, net expenditure in 2023 was higher than expected at the time of the recommendation (by 0.8% of GDP). Therefore, as the recommendation for 2024 was formulated as a growth rate, the assessment of compliance also needs to take into account the base effect from 2023. Had net expenditure in 2023 been the same as expected at the time of the recommendation, the resulting growth rate of net expenditure in 2024 would have been above the recommended growth rate by 0.7% of GDP. Therefore, net nationally financed primary expenditure is assessed as at risk of not being fully in line with the recommendation. According to the Commission Spring 2024 Forecast, the net budgetary cost of emergency energy support measures is estimated at 1.7% of GDP in 2023 and projected at 2.0% in 2024, and 1% in 2025. The emergency energy support measures are not projected to be wound down as soon as possible in 2023 and 2024. This risks being not in line with what was recommended by the Council”.

In not so many words the EU Commission is saying that the public deficit sustained in 2023 had been at a higher level than forecasted when taken in consideration the projected level for 2023 and that since there is no intention to wind down the energy subsidies that the EU Commission has lost confidence that the 2024 deficit would grow below the level recommended by itself, when taken in consideration of GDP.

What is being said here by the EU Commission is a surely a déjà vu.

In the Assessment of the 2024 Draft Budgetary Plan, issued by the Malta Fiscal Advisory Council in December 2023, this same council recommended that “Prepare an adequate exit strategy in relation to the fixed-energy-price policy, adopt a more targeted approach and enhance incentives for energy savings. Any potential expenditure savings or higher than projected revenue should be directed to build fiscal buffers. Government should avoid inflating government spending, especially that which is not productive. Means of expenditure restraint should be explored in order to ensure that the minimum required fiscal effort is achieved”.

In the recommendations issued by the IMF on 29 January, these stated: “With Malta’s economy above potential, and with tight labour markets, elevated inflationary pressures and sizeable fiscal deficits, directors stressed the need for accelerating fiscal consolidation to support disinflationary efforts and to rebuild fiscal buffers at a faster pace to bolster fiscal sustainability. They noted that energy subsidies place a substantial burden on the budget, limit fiscal space for supporting productivity‑enhancing reforms and blunt incentives for energy savings and efficiency. They recommended that such subsidies be phased out while increasing targeted support for vulnerable households. Directors also called on the authorities to continue steps, supported by Fund TA, to modernise revenue administration, rationalise recurrent spending, enhance public investment efficiency and strengthen oversight of public enterprises.”

The writing is on the wall. Expecting that we can keep subsidising energy prices for everyone ad infinitum is not only unsustainable but is going to lead us into more problems that what we are trying to solve. This also includes curbing fiscal deficit as we cannot continue to amass debt to the tune of €800m to €900m per annum. To seriously address this, we need to address structural problems we have been avoiding in relation to the sustainability of our national healthcare system and pensions, together with employment in the public sector. The country urgently needs proper leadership by all political forces to do what is needed and not what is popular. Will anyone rise to the occasion?

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