Energy support equal to half of Malta’s subsidy spend

Subsidies will peak at 12.3% of government expenditure this year with almost half being directed towards the energy sector, a Central Bank of Malta analysis shows.

The share of subsidies is expected to decline gradually to 6.6% of total expenditure by 2025.

The analysis shows that government spending on subsidies has undergone major changes in recent years. The proportion of subsidies in relation to GDP increased from 1.4% in 2019 to a significant 5% in 2022 and will remain higher than the levels observed in 2019 until approximately 2025.

A shield in times of adversity

The composition of subsidies has experienced a significant transformation, primarily due to the impact of the COVID-19 pandemic and the conflict in Ukraine.

In the pre-pandemic era, subsidies were primarily allocated to Public Service Obligation contracts, which supported essential services like the Gozo ferry, the bus service, and public broadcasting. Additionally, subsidies were provided to the film industry and for ensuring spare electricity capacity. Some subsidies were directed towards vulnerable households, such as the eco-reduction benefit for offsetting residential utility tariffs and feed-in tariffs for electricity generated by solar photovoltaic systems.

However, the pandemic and inflationary pressures prompted the introduction of new support measures between 2020 and 2022. These measures were meant to mitigate the adverse effects of COVID-19 and high inflation on the Maltese economy.

Notable COVID-19 support measures included the Wage Supplement Scheme, household vouchers, and subsidized interest payments on government-guaranteed debt. To counter inflation, subsidies were passed on to public sector entities to maintain fixed retail prices of electricity, fuel, and household gas.

But additional support measures implemented in 2022 were related to the restructuring of Air Malta, including an early retirement scheme for employees.

Overall, a significant portion of subsidies between 2020 and 2022, averaging around 73% of the total, was allocated to COVID-19 and energy price shock-related support measures. In 2023, approximately 60% of the projected subsidy spending is expected to be attributed to fuel cost support measures.

While the outlays on these support measures are anticipated to decrease in the following years, they are still projected to account for approximately 38% of subsidies in 2024 and around 32% in 2025.

From COVID to inflation

COVID-related measures constituted about 69% of the total subsidies each year in 2020 and 2021. However, this dropped to 17% in 2022 as these measures were phased out. In contrast, there was a significant increase in subsidies related to inflation mitigation measures in 2022, which made up approximately 39% of the total. The report forecasts that these measures will comprise around 49% of the total subsidies in 2023. As energy prices are expected to decline, the percentage of support measures within total subsidies is estimated to decline to around 38% in 2024 and approximately 32% in 2025.

In 2022, support provided to Air Malta accounted for approximately 17% of the total subsidies. The latest Stability Programme outlines the implementation of a second early retirement scheme in 2023, which is projected to represent around 10% of the total subsidies, according to the Bank’s forecasts.