Edging towards normality
Author: George Mangion - Senior partner at PKF Malta
Published on Business Today: 16th June 2022
Business analysts, politicians and practically every organisation have become obsessed with this term ie, normality – whose meaning is increasingly ambiguous. It appears as if a large cohort of Maltese society is paralysed and unable to effectively object to the notion that achieving “normality” is a sacrosanct right after having suffered so much by way of furlough wages and being locked inside working online (while caring for children as schools were shut) for many weeks at a stretch.
Again, it is no consolation that the Opposition continues to beat the drums singing to the tune that Malta is invariably corrupt. These accusations allegedly involved key persons at Castille. They have taken prominence at pre-election meetings, around dinner tables, in places of work and, of course in the media, whether independent or regime-controlled.
Colin Regan writing in the Times of Malta laments that the island is busily engaged in the self-destruction of its land, sea, resources, self-respect, and perhaps worst of all its youth. The dignity and strength that is a historical part of Maltese national and international identity has been elbowed aside for crassness, greed, and short-termism.
A quick analysis of our economic performance is the whopping first quarter deficit of €371.6 million (as reported by the National Statistics Office). One cannot but forget the umpteen promises that once elected the PL promised no new taxes but logic tells us there is a poisoned chalice - reality will catch up with us to start repaying the accumulated €3 billion deficit.
The island is witnessing a widening of social inequalities with the richest 20% earning 37% of the total income, and the poorest 40% earning only 22% of the total income. Let us try to focus how Malta posted the highest deficit in EU with resultant increase in state borrowing.
At the end of March, central government debt stood at €8,466.3 million - a €1,170.8 million rise from 2021. It is not difficult to explain why our economy was also hit by inflation due to the Ukraine war. The war has disrupted the supply of corn, gas, metals, oil and wheat, as well as pushing up the price of critical inputs such as fertilizer. These developments have prompted warnings of a looming global food crisis.
Back home, government debt, currently close to 60% of GDP, is projected to increase steadily, reaching around 73% of GDP in 2032 in the baseline. Brussels sources guide us that with this level of deficit, Malta is expected to be included in an Excessive Deficit Procedure (EDP) next year, once the rules, better known as the Maastricht criteria, are back.
One may draw a parallel to the similar excessive deficit situation recorded in 2012/3 by the outgoing PN administration. I remember how finance minister Edward Scicluna had heavily criticized John Dalli (ex PN, finance minister) saying his profligate spending will lend us to incur penalties (under the Excessive Deficit Mechanism) from the Commission.
Of course, in 2013 following a landslide win in the general election the prime minister of that day Joseph Muscat had an ace card up his sleeve - how to quickly kill the deficit. This consisted of a confidential agreement with Henley and Partners to launch the “Golden Passports” scheme - a windfall which attracted oligarchs with deep pockets buying passports yielding a cool €1.6 billion to boot.
A similar fiscal shortage is facing Clyde Caruana finance minister who is currently navigating the ship of state through stormy waters. Our excessive deficit is close to exceeding the Maastricht rules so it must be reduced to under 60% of GDP.
Can the young economist conjure a hat trick and reap a windfall? Not so easy now, as Malta went from medium to high risk category when assessed in the latest Fiscal Sustainability Report (FSR) for 2021. Brussels moved Malta from a ‘medium risk’ to a high-risk category for both its medium- and long-term public financing.
Officially, Malta exclusively blames the pandemic for such imbalances. It says, the deficit is mainly driven by the country’s current budgetary position, which has been severely depleted by government spending during the pandemic. The good side is that immediate risks to Malta’s sustainability, however, remain classified as low in the FSR report. Conversely, according to the report, Malta’s long-term financial sustainability appears to be at a high risk.
This risk is mainly driven by the projected increase in ageing costs. As Malta’s population gets older, expenditure on pensions and healthcare increases. The main components in extra state expenditure involved added outlays towards social security benefits, following two regular payments of retirement pensions made in March (€66.1 million), economic stimulus payments (€48.2 million), tax relief measures (€25.8 million) and assistance to help the elderly live independently (€12.4 million).
International fuel and LNG prices are skyrocketing but locally no increases to motorists so far at the pumps. Journalists were placated by Miriam Dalli, the energy minister saying that government allocated €200 million in last year’s Budget to softening the blow of high energy estimates (another tranche is now due).
She added that government has no plans on increasing energy tariffs to make up for heightened public spending.
On the international front, since the 24th February, when Russian troops invaded Ukraine, one hoped that the war would be brief and common sense would prevail culminating in a quick ceasefire agreement. This war is now in its 110th day and there is no olive branch in sight.
Brent oil recently reached the $120 per barrel. The IMF now expects that the sanctions imposed on Russia will shrink its economy by 8.5 per cent which would represent just a quarter of the 35 per cent slump expected in the invaded Ukraine.
Back home, it is not all doom and gloom as several factors mitigate the risks for us over the long term. Our aces in the pack are Malta’s positive international investment position, relatively stable financing sources, a professional financial services workforce, the currency denomination of Malta’s debt, the drive to unveil a new fiscal tax model and historically low borrowing costs. Let’s start walking towards normality.
Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 16th June 2022
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