Issue link: https://maltatoday.uberflip.com/i/1512115
6 maltatoday | SUNDAY • 26 NOVEMBER 2023 NEWS MALTA has been warned that it cannot keep pumping tax mon- ey into subsidising the energy shock unleashed by rising gas prices and the war in Ukraine. The European Commission, the International Monetary Fund and Central Bank Gover- nor Edward Scicluna have told the Maltese government to wind down its energy support meas- ures to bring down the deficit to below 3% of GDP. Budgetary projections show that the government will spend around €320 million in fuel sub- sidies every year until at least 2026. Instead, Brussels, said, the government should offer means-tested support measures for energy price increases rath- er than across-the-board aid. "Overall, the Commission is of the opinion that the Draft Budg- etary Plan of Malta is not fully in line with the Council Recom- mendation of 14 July 2023," the EC's opinion report last week read. "Therefore, the Commis- sion invites Malta to wind down the energy support measures as soon as possible in 2023 and 2024." A previous European Council recommendation had already said the government should wind down its energy support measures by the end of 2023, to bring down its deficit. "The en- ergy support measures are not projected to be wound down as soon as possible in 2023 and 2024. This risks being not in line with what was recommended by the Council." Even the IMF's concluding statement for 2023, while laud- ing the robustness of the econo- my, said Finance Minister Clyde Caruana must prepare an "exit strategy" from the generous en- ergy subsidy policy. It said only by weening off con- sumers from the subsidy, can Malta incentivise energy conser- vation, because gas price hikes on the global market were no longer temporary, and suppress- ing the price does not help the island's green transition. "The sheer size of the subsidies limits fiscal space in reallocating re- sources to productivity-enhanc- ing reforms while consolidating the fiscal position," the IMF said. IMF analysts also said Malta should start gradually phasing out the subsidies while protect- ing low-income and, to a lesser extent, middle-income house- holds – first by adjusting fuel prices to better reflect their im- port costs, while also making the electricity tariff structure more progressive. "A gradual move may ease pressures on consum- ers but would also delay the ben- efits of exit while leaving public finances vulnerable to further energy price increases." It also said that to implement its 2021 Low Carbon Develop- ment Strategy, consumers had to be able to appreciate the cost of market energy prices to change consumption behaviours. Clyde Caruana says the gov- ernment is aiming at bringing the unit cost of electricity down before it can start phasing out the costly fuel subsidies – mainly through an offshore renewable project and a second intercon- nector to Sicily. Yet even Central Bank gover- nor Edward Scicluna last Friday echoed both the EC and the IMF in saying that subsidies should be targeted and temporary. He suggested that while keeping domestic demand buoyant, the subsidies might also be counter- ing a relaxation in price inflation. Addressing the Institute of Fi- nancial Service Practitioners in his annual speech, Scicluna said that while post-pandemic supply bottlenecks appeared to be cor- recting themselves, Malta's €320 million in subsidised energy and fuel prices could be countering a disinflationary effect. "Overall inflation in Malta is set to ease further in the coming months. The disinflation pro- cess is largely being supported by the resolution of supply chain bottlenecks and the lagged im- pact of tighter monetary policy on imported inflation," Scicluna said. However, he said, a number of domestic factors were now working in the opposite direc- tion. "These include a still dy- namic economy buoyed to some extent by the support to demand arising from the energy subsi- dies," Scicluna said. He also added that a weak pass-through of the higher rates on deposit and lending rates in Malta were also supporting ro- bust credit growth, especially in real estate. This means that with more cash in hand, price infla- tion might not be abating as fast as desired. "This state of play may be good for economic growth in the short-term. However, it also means that the power of a key policy tool that is geared towards dampening demand and hence inflationary pressures is severely diluted in Malta," Scicluna said. Robert Ghirlando, a professor of engineering, has previously told MaltaToday that govern- ment should use different meas- ures to prevent fuel poverty, rather than an indiscriminate subsidy. "In the UK, the gov- ernment was giving a subsidy to pensioners struggling with the cost of living. What would happen if the government were to, say, widen the tax bands in- stead?" He also pointed to the water tariffs offered in Malta, where basic water consumption is billed at subsidised rates whilst, beyond that amount, commer- cial rates apply. "One of the big- gest issues is not talking about energy consumption," Ghirlan- do had pointed out. "We speak MATTHEW VELLA & NICOLE MEILAK mvella@mediatoday.com.mt • nmeilak@mediatoday.com.mt Malta's mega-millions spend on subsidised energy and fuel prices need an exit strategy – so says Brussels, the IMF and Edward Scicluna Malta warned energy subsidies