Energy subsidies have cost Malta significantly more than the COVID-19 pandemic, Finance Minister Clyde Caruana said on Tuesday, as he defended the government’s decision to keep shielding households and businesses from soaring international energy prices.
Speaking at a Times of Malta pre-Budget debate, Caruana said the government had spent around €1.35 billion on energy subsidies so far, compared with about €800 million on measures related to the pandemic.
Of the energy subsidies, he said around €400 million was expected to be spent this year and a further €400 million next year.
“The energy crisis is far bigger than Covid,” Caruana said, arguing that the government needed to do more to explain to the public the scale of the burden it was absorbing.
He said Malta’s households and businesses would face a very different situation if they had been forced to absorb even part of the increase in international energy prices.
The minister said the government was now forecasting €400 million in subsidies by the end of this year, more than double what had initially been anticipated. He attributed the deterioration to the prolonged war involving Iran and worsening external pressures, warning that the coming winter was likely to be challenging.
‘Law of diminishing returns’
Caruana acknowledged that the government was facing what he described as the “law of diminishing returns” when it came to measures aimed at supporting households.
People now had higher expectations of government support, he said, meaning that measures that would have generated significant satisfaction five years ago no longer had the same effect.
“Whereas five years ago people were happy to receive €100 to €120, now they expect much more,” he said.
He also confirmed reports that he had told social partners at the Malta Council for Economic and Social Development to “remove their head from the clouds”.
Caruana said the international situation meant Malta had to be realistic about the constraints facing the government.
Subsidies will stay
Despite acknowledging that subsidies encouraged waste, Caruana said he was unwilling to alter the system because of the potential impact on economic confidence.
He estimated that the government might be wasting around €20 million through subsidies going to people who did not necessarily need them.
But, he argued, the economic cost of creating uncertainty over whether subsidies would be withdrawn could be considerably higher.
“If I start playing around with these, people would say Caruana is going to start killing off subsidies,” he said.
Consumers could respond to fears of higher bills by spending less, while businesses could also reduce investment, he argued.
Caruana said energy prices would not continue rising indefinitely. High prices would eventually lead to weaker demand, higher interest rates and an economic slowdown, forcing markets towards a new equilibrium.
He also pointed to the fact that some countries were reverting to coal as evidence of the pressure created by high energy costs.
Deficit to remain at 2.8%
Caruana said the government expected to end the year with a budget deficit of 2.8% of GDP and expected the figure to remain at roughly the same level in 2027.
He said half of the deficit, equivalent to 1.4% of GDP, would be attributable to energy subsidies.
That, he argued, showed that Malta’s underlying finances remained under control.
Caruana said he had gone through individual ministry budgets and ensured money was being allocated where it could be spent efficiently.
He acknowledged that he had economised on some ministries and budgets, describing the removal of “fat” as a natural process in every legislature.
Capital and recurrent expenditure would nevertheless continue to rise in aggregate, he said.
Super Bonus remains a tax cut, minister says
Caruana also defended Labour’s €1,000 “super bonus”, saying he would have promised the measure himself had he been Labour leader.
He described it as “a tax cut by another means” and said the government had opted for the mechanism because simply rearranging tax brackets would have left around 75,000 taxpayers either excluded or benefiting very little.
“I came up with the idea of the super bonus myself,” he said. “I completely endorse it.”
However, he refused to confirm whether this bonus would be announced in the upcoming Budget.
On the other hand, he did confirm he was not planning to touch VAT, income tax or social security contributions.
Debt up €6 billion since 2020
Caruana acknowledged that Malta’s national debt had risen by around €6 billion in absolute terms since 2020.
But he pointed to the country’s debt-to-GDP ratio, which he said remained relatively low at around 46%.
He attributed around 70% of the increase in debt to three major shocks or interventions: the COVID-19 pandemic, energy subsidies, and the closure of Air Malta and creation of KM Malta Airlines.
“Tell me which of these three you would do without,” he said.
Asked whether he would make the same decisions again, Caruana said he would.
Population could hit 800,000 by 2040
The minister confirmed that, at the current rate of population growth, Malta was on track to reach a population of 800,000 by 2040.
But he placed much of the responsibility for the country’s reliance on foreign workers on employers rather than government.
To increase production, he said, an economy needed either more capital or more labour. Labour had traditionally been the easier and cheaper option, leading employers to favour bringing in more workers.
Caruana said Malta could not continue relying on an ever-growing supply of labour if it wanted productivity to increase.
“If you want to increase productivity, you need to have more capital and less labour,” he said.
The solution, he argued, was greater investment in capital and technology rather than continually asking government to make it easier for employers to recruit workers.
Doubts over light rail
Caruana also expressed scepticism over the proposed light rail project, saying he was still unsure whether Malta could afford it.
He said he had not seen the studies referred to during the electoral campaign and questioned claims that construction could cost as much as 30% to 35% of GDP.
His concerns were reinforced, he said, by discussions with people from international institutions, including the World Bank.
“I’m not trying to pour cold water on the idea,” he said. “But I’m saying I need to see some numbers.”
Caruana said election promises could only become reality if they made numerical sense.
‘I will spare nothing and no one’ on KM
On KM Malta Airlines, Caruana promised a fuller account of the airline’s history when he believed the time was right.
He said the airline’s accounts would be made public and offered to debate the issue with the Opposition for as long as necessary.
“When the time comes I will spare nothing and no one, because I have had enough with the undercurrents,” he said.
Caruana confirmed that the government was discussing the airline’s future with major carriers and had signed several non-disclosure agreements.
The government has previously said it wants to part-privatise KM Malta Airlines, and Caruana said this was part of an agreement with the European Commission that he intended to honour.
He said he had both a Plan A and a Plan B, but that both were designed to ensure the airline had a future.
“I am irritated with attempts to derail things involving the airline,” he said.
“There are many mercenaries who would like to see that the airline goes bust again. But it won’t happen.”
Tourism tax not ruled out
Caruana also refused to rule out an increase in tourist taxes.
He said he had reviewed ministry budgets and that the government had sought to direct money towards areas where it could be spent efficiently.
With the government facing rising subsidy costs and pressure to deliver election promises, the Finance Minister’s message was that the coming Budget would have to balance those commitments against the increasingly expensive task of shielding the economy from the global energy shock.
