Utility hikes are a recipe for stagflation

The year 2009 was a very difficult year for the economies of many countries. We saw the worst financial crises in more than 75 years, which led the world economy into a deep recession. However, while the economies of many countries like Germany, France and Italy are slowly recovering, Malta is still in the grip of a recession. Exports from our factories are on the decline, unemployment is on the rise; retailers are reporting big drops in sales, hotels are facing big decreases in revenue. The rising unemployment in the UK, which is still in recession, will surely affect negatively our tourism industry. It is no wonder that the year ended in a feeling of doom and gloom.

The US government and those of most EU countries, in order to save their economies from the ravages of a major recession, pumped trillions of dollars and euros into their national economies. They have avoided a catastrophic depression and have at least jump-started a slow recovery. They were very wise in their decisions not to balance budgets and tighten belts during a major downturn. Such a line of action would have been a tragic mistake on their part.

The government of Malta on the contrary is taking a different approach. It has decided to introduce astronomical tariffs for water and electricity, which surely are going to hit very hard our factories, hotels and firms, which are already in a very difficult situation. These high tariffs would force many businesses to raise prices, lay off workers or even shut down and are surely going to prolong the recession.

They will also make our industrial and touristic products less competitive on the international markets. Besides, they are going to further increase the already high level of inflation. The rise in the tariffs will be passed on to the consumers in the prices of products and services. Malta's inflation is the highest registered in the eurozone. While the economy is contracting, Malta has still a high rate of inflation, which is going to be further pushed by the new tariffs.

The government's decision to increase the water and electricity tariffs is surely a recipe for disaster. It will surely lead to a classic situation of stagflation, i.e. a period of stagnant economic growth and high unemployment (stagnation) accompanied by high prices (inflation), a condition which is very difficult and costly to eradicate once it gets started.