There is a very good reason why first-world economies don’t use populist measures: they don’t work. Labour seems to believe that is re-inventing the wheel by executing a populist subsidy policy when these kind of policies are already widely applied in many third-world countries including in Egypt and Pakistan.
Finance Minister Clyde Caruana has changed his position significantly ever since becoming the Finance Minister. Initially the Finance Minister was very skittish with public finances and made serious efforts to instill the idea that subsidies need to be phased by a long-term plan.
The Finance Minister now seems to have given up altogether on the idea that fuel and electricity subsidies will be phased out. Now he is saying that if subsidies are removed, an economic catastrophe will ensue. The Labour government is spending up to 1% of the GDP and more in fuel and electricity subsidies every year.
And there will be more. eventually the Labour government will be issuing a €1000 subsidy cheque to all Maltese individuals. The measure has been postponed this year because the government has overshot its deficit targets.
The measure is obviously destructive to public finances as it consolidates the deep hole of subsidy dependency. Indeed. One of the reasons why populist measures don’t work is that they create new dependencies and forfeit expenditure on more important items such as capital expenditure.
Multiple energy shocks in the last five years have made it very clear that Malta needs a new power station to produce cheaper electricity. The Minister of Finances himself has admitted that the locally produced electricity is cheaper than electricity imported from Europe via the interconnector to Sicily.
But Labour did not build a new power station because it is more concerned about getting elected and remaining in power rather than building the country. Instead, Labour is opting to issue a raft of populist subsidies to retain its popularity while the infrastructure crumbles, traffic gridlocks the island on a daily basis, and Malta remains extremely vulnerable to external energy shocks.
The Nationalist Party yet still needs to articulate the destructive recklessness of Labour’s populist policies. A new administration following Labour is going to be faced with a fiscal disaster – and this is what Labour wants. Labour is looking ahead only as far as it remains in power and its reckless legacy is probably even by design: Labour plans to hand over a very difficult fiscal situation to its successor while it breaks the bank.
Currently the debt to GDP ration at is still at 46.5% which is large but not critical or even seriously problematic. However this situation can get progressively worse if the Labour retains its populist fiscal policies at full speed.
This is like when you have a pot of money and you are constantly spending it at much higher rates than your income. Eventually you will run out of money and enter into fiscal troubles. Labour plans to struggle with finances to retain a semblance of stability but on a long-term basis, Labour is building a legacy of debt and fiscal horror that will only be addressed after Labour leaves office.
Post-Labour we are going to be left with a massive fiscal hole, a dependency on subsidies and a broken infrastructure. This is because Labour’s fiscal policies are not in the national interest, they are in the exclusive interest of the Labour Party itself which can only retain power by distributing free money.
Image below with apology to Conks.
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