The economic sense of subsidies

The recent outbreak of the Iran war and the subsequent, inevitable spike in global oil and gas prices have reignited a fierce debate in the Mediterranean: the sustainability of the Maltese government’s policy on energy and fuel subsidies. As Brent crude surges toward the $100 mark once again, the “Maltese exception” – where energy prices remain frozen despite international chaos – is under intense scrutiny.

In economic theory, subsidies are primarily viewed as shock absorbers. When a sudden, exogenous shock (like a war or a pandemic) hits, the “Temporary vs. Permanent Shock” framework suggests that governments should intervene to prevent a “price cliff”. By absorbing the initial blow, the state prevents a downward spiral of reduced consumer spending and business insolvency.

However, subsidies are not intended to remain in perpetuity. According to the Principle of Market Signals, prices serve as essential information. When the state permanently masks the true cost of a resource:

• Incentives vanish: Consumers have no reason to conserve energy;
• Innovation stalls: Businesses feel no pressure to pivot to more efficient technologies; and
• Fiscal drag: What was meant to be a temporary bridge becomes a permanent weight on the national debt, reducing the country’s ability to respond to the next crisis.

Malta’s commitment to price stability has come at a significant fiscal cost. Below is the breakdown of the estimated expenditure on energy and fuel subsidies alongside the average spot price of Brent crude oil for those years.

This means that over four years we have spent €1.17 billion in energy and fuel subsidies.

Which brings about the important point of resilience. We are living in an era of “polycrisis”, where the world appears to hop from one geopolitical or environmental catastrophe to another. In this reality, a country’s greatest asset is resilience. Resilience is not just the ability to spend; it is the ability to have a deep and large enough “war chest” available exactly when the peak of a crisis hits.

To maintain this fiscal firepower, a strategic shift based on sound economic principles is needed. Both the IMF and the Central Bank of Malta have advocated for an “exit strategy” – moving away from universal, untargeted subsidies toward a more flexible model. This involves limiting or reducing subsidies during “peace” periods – times when energy prices are lower or the crisis is not at its peak.

Reducing the subsidy during milder periods serves two critical purposes:

1. Fiscal replenishment: It allows the government to reduce the deficit and build reserves, ensuring that when a massive shock (like the 2026 Iran war) occurs, the state has the financial strength to protect the most vulnerable while still managing to keep fiscal sustainability.
2. The inducement for change: Removing the “artificial safety net” during stable times acts as a powerful economic inducement. When businesses and households face even a gradual return to market-reflective pricing, the Return on Investment (ROI) for renewable energy and energy-efficient retrofitting becomes far more attractive.

The economic sense of subsidies lies in their timing. Using them to blunt the sharpest edge of a war-induced spike is sound social policy; using them to hide the reality of a changing energy landscape during periods of relative calm is a missed opportunity. By tapering support when the pressure is lower, Malta can build a more resilient economy – one that is both financially prepared for the next storm and equipped to outrun it.