Malta’s open economy makes it vulnerable to external factors that are largely beyond the control of local economic policy makers. The worst phase of the pandemic is probably over. But there are evolving international economic issues that call for prudent medium-term fiscal planning in order to avoid having to make unpleasant corrections in the coming years.
The budget for 2022 is rich in micro measures to support social solidarity. It is not surprising that these measures have made the news better for many people who, understandably, view the budget from their perspective. But, like managing family finances, we cannot avoid the harsh reality that what we spend today can only be financed by economic growth, loans or increased taxation.
Finance Minister Clyde Caruana built his projections on the basis of optimism. He projected real GDP growth of 6.5 percent in 2022 to get the most out of domestic demand. He also assumes that inflation will be a modest 1.7 percent in 2022 and that employment will grow by 2.2 percent.
These economic indicators should make the EU’s partners in Malta green with envy. But is it prudent to hope for the best when some storm clouds are threatening the global economy?
The IMF has just advised central banks to be “very, very, vigilant” about rising inflation and to take early steps to tighten monetary policy if price pressures persist. While the current economic phase is not yet labeled as ‘stagflation’ – slow growth and high inflation – the risks are becoming more real every day. Food prices and the cost of energy are rising rapidly. These will affect the pockets of families in Malta and in the source markets of our tourism industry. Consumer behavior can change.
Meanwhile, the fiscal support given to local businesses to guarantee their liquidity during the pandemic will soon end. Malta’s tax authorities have been among the most generous in supporting local business in the last two years. But now we need to start thinking about how the cost of this support will be repaid without putting the can on the road, and letting future generations solve the problem.
It is unclear how the FATF greylisting will affect future foreign direct investment. It is unrealistic at best to assume that this stain of reputation on Malta fails to influence the perception of foreign investors when considering where to find their business.
The agreement reached by the OECD to increase the minimum corporate tax rate for international companies to 15 percent could become another factor reducing the country’s attractiveness to foreign investors.
It would be most inappropriate to talk about the introduction of austerity measures when the economic recovery is still weak. But the finance minister needs to be more forthcoming to define how the government plans to improve the country’s competitiveness in the context of adverse global developments that could affect Malta.
We commend Caruana for challenging some aspects of the country’s economic model, which depends too much on property development. His comments on the importance of an improved education system were also appropriate. As we have highlighted in this column before, his serious comments should now be followed by an action plan that goes beyond isolated short-term initiatives. They never make a real difference in the renewal of the education system.
The budget for 2022 was tactical. But it has failed to offer a strategic vision for a restructured economy that is highly exposed to the global economic wind and increasingly relies on sustainable competitive advantages.
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