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Clyde Caruana stresses need for discipline in public spending but is short on budget measures

Malta’s economy will grow by a moderate 4.4% next year and the deficit will decrease to 4.5%, forecasts presented in the pre-budget document unveiled by Clyde Caruana show.

The Finance Minister gave a detailed macro-economic presentation to the social partners on Wednesday at the start of a consultation process leading to Budget 2024.

The 124-page document is short on measures Caruana will include in the budget – presumably he will want to leave the surprise for budget day on 30 October – but is strong on economic analysis and policy statements.

Even the widely-expected change to introduce a minimum 15% tax for corporations, an imminent EU requirement, is mentioned but no timeline is given for its introduction.

In his strongest emphasis during the business breakfast, Caruana said he had a moral obligation to ensure discipline in public spending.

Inflation and wages

On inflation, Caruana said 2023 would end with an average inflation rate of 5%. “Inflation is going down but it is still high and will remain so in the medium term,” he said.

He confirmed the COLA wage increase next January will be higher than last year’s record of €9.90 but said the amount will be finalised later this month. MaltaToday reported last Sunday that COLA is expected to deliver a wage increase of around €13 per week.

The COLA increase has to be paid by the employer and if any proposal reaches my desk for government to absorb part of this increase it will simply join other papers in the in-tray and remain there Clyde Caruana

Caruana did commit to ensure the minimum wage will remain tax free but made it clear government will not be subsidising any of the wage increases. “The COLA increase has to be paid by the employer and if any proposal reaches my desk for government to absorb part of this increase it will simply join other papers in the in-tray and remain there,” Caruana said emphatically.

Wage developments in 2022 show that although nominal wages increased by 3.3%, higher prices outpaced wage growth leading to a decline in real wages.

The document says inflation was contained by government’s decision to shelter consumers and businesses from international price rises in fuel, energy, grains and animal fodder.

Subsidies to keep prices stable in these key commodities have cost public coffers €514 million between the onset of the war in Ukraine and June 2023.

The document does not contemplate a scenario where these subsidies are withdrawn as the European Commission is expecting member states to do but in his address Caruana insisted the budget had to take into account the wider European and international context.

He said it was important people are sensitised to the level of indirect support they were benefitting from through government’s policy action to subsidise fuels and electricity.

“If on 30 October I decide to withdraw the subsidy, motorists will see an immediate increase in the price of fuel at the pump of 45c per litre and electricity bills will increase substantially,” Caruana cautioned. “I say this so that people do not take things for granted because with the hundreds of millions being spent to shield people and the economy much more could be done in other areas.”

He said the level of support could not be maintained for ever, acknowledging the pressure being made by the European Commission but hinted government will remain committed to keeping the subsidies next year.

Vigilance and discipline in public spending

Caruana said his ministry will continue to implement its plan for “sustained reduction of the budget deficit and controlled government debt, to gradually align with the European Commission’s fiscal rules”.

The forecasts presented in the document show that Malta will adopt a gradual path to deficit reduction going below the 3% deficit mark stipulated by the Maastricht criteria in 2027.

The Finance Minister said 2023 will end with a deficit of 5%, an improvement from the 5.5% previously forecast, and projected a further decline to 4.5%.

“For this plan to be successful, further vigilance, action and firm decisions shall be required. These decisions will be taken boldly,” Caruana reiterated.

He said it was imperative that government spending be judicious, stressing the need for fiscal discipline.

“I have a moral and political obligation that the country’s finances are spent wisely, even if it means I am viewed in a bad light… we need to be sober because uncontrolled spending will always punish those on the lower rungs and that is something I cannot live with,” Caruana said.

The Finance Minister said Malta’s debt-to-GDP ratio is and will remain below the 60% threshold. Figures show that Malta’s debt will hit 53.2% by the end of 2023 and is forecasted to increase to 54.5% next year.

“Debt remains the most important metric and Malta remains in a very strong position,” Caruana said.

More to follow.