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8 OPINION 14.9.2023 Projections on a 2024 economy George Mangion George Mangion is a senior partner at PKF, an audit and consultancy firm, and has over 25 years' experience in accounting, taxation, financial and consultancy services. His efforts have made PKF instrumental in establishing many companies in Malta and established PKF as a leading professional financial service provider on the Island T his article borrows extensively from the latest fiscal report is- sued under the Fiscal Responsi- bility Act, exclusively by Malta Fiscal Advisory Council (MFAC). It is encour- aging to note, that the MFAC reiterates a caveat in view of the current circum- stances in the global economy, reflect- ing a sensitive macroeconomic outlook. Certain assumptions are critical to the projections made. These incor- porate the future development rate of tourism, remote gaming, manufactur- ing and financial services. What are the salient statistics that emerge out of this report. One starts by mentioning the increase in 2022 of national debt by €866 million, yet so far it appears that the debt to GDP ratio will hover around the prescribed level of 60% - this is the higher limit mandated un- der the Maastricht rules but recently temporarily relaxed due to Covid 19. What is the main cause for such an increase in debt? For a true answer, one needs to examine various factors but it is easy to assume that the cash grants and vouchers issued by Mal- ta Enterprise during the two years of Covid contribute to the lion share of debt. Another major expenditure, is the capping of energy and cereals prices to ensure stability and tame inflation. Notwithstanding this, both total rev- enue and total expenditure have been revised upwards, mainly due to higher current taxes on income and wealth as well as higher expected costs in subsidies reflecting such energy sup- port measures. The MFAC favourably notes the public debt ratio is expected to remain marginally below the 60.0% threshold. Obviously, as ECB continues to raise interest rates to subdue inflation, one expects a higher cost to servicing our enhanced debt levels. This interest is estimated to hover around €500,000 daily. As stated earlier, the MFAC points out the unexpected high stim- ulus cost of the pandemic which led to two consecutive years of large fiscal deficits. The large deficits in 2020 and 2021, led to a steep increase in the debt ra- tio, contrary to the consistent declines which were experienced previously. Malta's economy is forecast to grow at a significantly higher rate of 3.9 per cent this year (compared to almost 6% previously). Previous high-spending tactics (such as a multimillion subsidy of Holly- wood films shot locally) will soon need to be reined in, however, as the EU looks to curb inflation by revising its fiscal policies to reintroduce limits on deficits and debt levels. The MFAC projects that the debt- to-GDP ratio to fall just below 40.0% in 2025. Non-discriminatory subsi- dies are always criticised in modern economic theory as these tend to be wasteful yet they remained high as pandemic support continued. One cannot omit to mention the haemorrhage of funds to buttress the struggling AirMalta airline. Losses are causing the treasury a heavy drain as the airline badly needs fresh capital to buy modern aircraft to its arsenal of 100% leased planes. Lack of hardware has caused many delays this season. The MFAC report reveals other sub- sidies reach €10.0 million in 2022 and €75.0 million in 2023. This is a sign of times that employees claim subsidies to make up for cost-of-living increases based on a study conducted on previ- ous year. eg, COLA of €9.90per week this year to reach €13.5 in 2023. A novelty is the plan to shift public investment from that on public in- frastructure, road and transport net- works to incentives encouraging thus more green and digital investment. The hon Miriam Dalli personally ap- pointed an ex-banker to head a €700 million green project to start full scale afforestation and rapid creation of more green parks. Back on the subject of energy and food subsidies, this has been remarked upon by The Commission which sug- gested that such subsidies should be re-directed towards reducing the bur- geoning public debt. Some, may have forgotten the profligate policy of sub- sidies and the other components in total expenditure during the years of the pandemic. This splurge reflected the cash assistance provided by Mal- ta Enterprise to support employment through various initiatives including furlough schemes. The Finance Ministry is exerting prudence in allocating less funds for 2023/4 with respect to mitigating the sharp increase in public funding schemes run during the two years of pandemic. The media revealed that minister has instructed other big spender departments and government agencies to cut back expenditure -at least by €200 million. Above all, the projections in the MFAC report are subject to changes in exogenous factors such as the in- tensity of the Russian war in Ukraine and success in taming of inflation within Eurozone. It is heartening to note, that the risk assessment carried out by the Fiscal Council suggests that both the fiscal balance and public debt could possibly fare better than expect- ed by the Ministry of Finance. In this European slowdown, many ask what is the effect on our economy as Britain is expected to face persis- tent inflation this year and next? Be- fore the onset of a slowdown, Malta enjoyed the highest number of tour- ists to arrive from Britain. This year, partly due to unbridled competition from cheaper holiday resorts, the statistics changed. Less Brits albeit partially replaced by a higher influx of Italian visitors. Another critical factor is the short- age of skilled labour and the nation- al policy of Identity Malta in widely opening the flood gates for more third country unskilled migrants. A similar situation prevails in Britain, which is currently facing shortage of workers, widespread strikes with constant de- mands for higher pay. Quoting the UK opposition leader, Sir Keir Starmer, he insists that the UK priority should be to up-skill low- skilled workers and not continue to rely excessively on imported workers so as to take advantage of lower wage costs. Other exogenous factors in UK, in- clude the global effect of the energy and food components which contrib- ute to sky-high inflation. In conclusion. Malta has the expe- rience, the political will and capacity to rescue itself from a stiff recession next year, should it choose to do so. The motivation for doing so is not hard to identify and harness – if well executed the road map secures the future well-being of each one of us, our families, extended communities, thereby guaranteeing environmental sustainability. Finance minister Clyde Caruana

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