True or false: Budget sophistry will not reduce national debt

Economists define “development” as a force for good, implying change resulting in growth and advancement to improve the quality of life for all citizens. Sustainable development can be given an economic definition: one that makes a country wealthier, better educated, healthier.

If this is the case, why do we have so many protesters voci­ferously complaining about excessive property development, permits for ODZ plots, over population with its deleterious impact on society. Can the 2026 budget address such problems? Can a solution be found to curb rising debt levels and boost sustainable export growth?

The increase in Malta’s debt from €10.05 billion in August 2024 to €11.13 billion at the end of August this year raises concerns. Read about the lamentation by the Shadow Minister for the Economy and Enterprise Jerome Caruana Cilia, who questioned quite bluntly, “Where is the money going”. He reminded us that Malta is still in the middle of an Excessive Deficit Procedure. It is true that the finance minister said he had no worries since the country would exit from this procedure early.

Be that as it may, annual cost of interest will probably exceed that of budget allocation for education. In February, debt exceeded €11 billion (it may go over €12 billion next year) and notice how recurrent expenditure is increasing faster than recurrent revenue, possibly to buttress domestic demand and sustain higher GDP levels. Ideally, more investment should go to promoting exports via the propitious use of experts at Malta Enterprise and Indis. These institutions collaborate when attending international conferences in an effort to attract multinational companies.

Another lamentation is the dubious policy of sustaining the economy through a policy based on thousands of imported TCNs workers (paid lower wages than natives).

Another fly in the ointment is the increasing number of defaults faced by bond investors. Quoting Paul Bonello (a retired stockbroker) he notices how the bond market has recently been under increased scrutiny. The tell-tale signs are that several companies appear to be under financial pressure. But the finance minister is not too concerned. He said defaults are an inherent part of investing in capital markets and form part of the general risk that investors accept when investing in bonds.

The result has been that,  contrary to the general belief of local retail investors, many local bond issues are unduly risky, most often due to the inadequate capital put in by the issuer and the consequent high gearing. One observes that some bonds are redeemed on maturity with fresh issues such that these fresh issues would consist of new debt to repay an old one. Can the 2026 budget proposals help solve such weaknesses?

This observation is not intended to exaggerate the risk profiles of bonds, many of whom have paid good coupon rates to investors in a country where there is not a rich stream of investment options. In retrospect, it is notable that unlisted bond issues were heavily oversubscribed by the public, despite the risk warnings outlined in the prospectus. But not everything is doom and gloom.

The economy has registered superlative growth percentages, while it is a consolation that debt-to-GDP ratio is still comfortably within the prudence limits defined in the EU’s Stability and Growth Pact. The general theme of the 2026 budget intention is to maintain family subsidies, pensions, and increases in social welfare. All this is a generous allocation of €1.6 billion. One notes, how this generous allocation is a clear demonstration of the government’s commitment to address the needs of families, pensioners, and vulnerable individuals amid evolving social and economic challenges. Additional cost-of-living allowances (introduced to cushion inflationary pressures,) are expected to continue.

Payments are based on household income and size, with larger families and those on lower incomes receiving the highest support. Again, kudos goes to the finance ministry for trying to elevate the level of productivity. The employers lament that real labour productivity per person is below countries like Cyprus and Italy. Perhaps a quick solution to the problem is a higher investment in R&D. Imagine if the interest paid on servicing debt could be switched over to a higher contribution to R&D?

By comparison, we lack adequate funds to improve investment, research, innovation and digitalisation. A recent EU country working document shows that the government in 2023, the last full year in the report, spent 0.64% of GDP on Research and Innovation (R&I) while the EU average is 2.24%. Finland invests over 3%; yet Malta’s underperformance in research and innovation is further exacerbated by a shortage of skilled workers, particularly in Stem subjects – science, technology, engineering and mathematics. Apart from any sleight of hand in the next budget, we need to focus on the need to increase productivity levels so that we can produce the same amount with fewer resources, thus increasing exports. Not an impossible task, which once achieved, will mean less strain on infrastructure, on hospitals, on education, and can seriously sustain a healthy environment. 

George M. Mangion is a senior partner at PKF Malta 

gmm@pkfmalta.com