Squaring circles

Silvan Mifsud is director of Advisory at EMCS Tax & Advisory. Mr Mifsud is also a council member of The Malta Chamber

I felt the need to keep writing on the major challenge Malta has staring at it. The need to restructure our economic model. Malta is presently facing the following situation. On one hand we have a ballooning public debt. To put things into perspective we went from a total public debt of €5.7 billion by end 2019 to €9 billion by end 2022. That’s an increase of €3.28 billion in public debt in the space of three years. Now obviously we all know why this happened, with the pandemic first and then the energy crisis that followed being the main culprits.

However, in order to keep our public debt on a sustainable level, as forecasted in the last budget speech, Malta has to grow its economy from the level of €16.8 billion at the end of 2022 to €20 billion by end 2025.  This economic growth is necessary as public debt is forecasted to grow to €12 billion by end 2025 and hence our public debt can only remain within the 60% of GDP, if our economy grows as forecasted.

Now, with our current economic model, to grow our economy to the forecasted level in 2025, that would mean that Malta’s population would need to get close to the 600,000 mark by 2025, fuelled by the increase in the needed foreign workers. That would mean a 9% – 10% increase in population over the level of population recorded at the end of 2021. This would mean more stress on Malta’s infrastructure, more construction, more traffic – well the works.

So in conclusion, we need to keep growing our economy, to allow our growing public debt to remain sustainable, but if we intend to keep growing our economy, with the current economic model, we will likely turn Malta in a more difficult place to live in, with more construction and environmental degradation and more traffic. Now some may argue that a solution to all this is to reduce the growth in our public deficit as a way to reduce the need to have strong economic growth. In principle this may be true and most of all it is advisable that government ultimately reigns in its spending, as it cannot keep increasing public debt at the rate of around €1 billion per year. However, even the increase in public debt was not happening at the mentioned rate, no economy should stop pursuing growth.

Which brings us back to the starting point, which was about the major challenge staring us in the face. How can we pursue economic growth without turning Malta in a more difficult place to live in, with an unsustainable level of resident population? This is where the need to restructure our economic model comes in. Let me try to give a practical example of this.

From January to April 2019 (the last year before the pandemic) Malta attracted 670,264 inbound tourists. Fast forward to 2023 and from January to April 2023 Malta attracted 710,959 inbound tourists. If one where to look at the total expenditure per capita one would see that for January to April 2019 this stood at €666 and for January to April 2023 this stood at €722. However adjusting for inflation (as between 2019 to 2023 we had a period of high inflation) to bring the expenditure per capita in 2023 to an inflation adjusted basis of 2019, one sees that the real expenditure per capita in January to April 2023 stood at €637. That’s a decrease a 4.3% decrease in tourist expenditure per capita in real terms when compared to the expenditure per capita in January to April 2019. So in essence when comparing January – April 2019 to January – April 2013 one sees that we got more tourists, but in real terms each tourists has spent less in 2023 when compared to 2019.  This brings me to the point of the need to restructure our economic model. Our focus at this point should be on how to make sure that a higher number of tourists bring with them a higher amount of expenditure per capita. It would be far better to bring less tourists and have each spend more than vice versa. This immediately brings along the so called million-dollar question – What needs to be done to increase our product offering to attract better quality tourists that will in turn increase the real expenditure per capita? My logic says that keeping our present economic model and increasing the level of resident population leading to more construction and more traffic will likely degrade rather than improve our overall touristic product.

In conclusion, I strongly believe we must stop trying to keep squaring circles. We must stop thinking that we can defy basic economic principles. We must take a hard look at ourselves, take stock of the challenge staring us in the face and reform our economy accordingly.