A €5.8bn national debt – how did we get here?
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A €5.8bn national debt – how did we get here?

Surpluses should go into a sovereign fund for future generations

€5,785,000,000 – this is the size of ‘our’ national debt as at December 31, 2016. This is my estimate based on adjusted September 2015 and 2016 official figures.

I use the term ‘our’ and not ‘Malta’s’ deliberately as we need to understand that every Maltese man, woman and child carries a share of this debt – in fact, around €14,000 each (1987: €600 each).

What has happened in Greece, where the middle class hit poverty levels, in Spain where youth unemployment reached 50 per cent, or Cyprus where 30 per cent of all bank balances over €100,000 were requisitioned by the government, are just three out of numerous extreme hardships endured by the citizens of bankrupt States. It is always the taxpayers who ultimately pay. This is what happens when the debt of a country spins out of control for some reason.

Not to worry though, our debt is only around 60 per cent of national output (GDP). Such a comforting thought! The same debt ratio for 1987 was 16 per cent.

National debt grows when a country spends more than the tax revenues it receives, and continues to consistently overspend and therefore has to constantly borrow more. Debt has a cost, and that cost also increases with the size of the debt. In 2016, the annual interest cost on the debt to Malta was €224 million.

How did we get here? Have a look at the chart. For all intents and purposes it started in 1987. There are no prizes for guessing who the Blues and the Reds are. This is one hot potato that cannot be passed around.

Both blue and red governments since 1987 are complicit. The red and blue in the bar chart represent the amount of debt accumulated by the Reds (25 per cent) and the Blues (75 per cent) respectively during their term in office. The addiction our country has to overspending is systemic.

When numbers are so large, it is difficult to grasp their true dimension. This may help. If you had to translate the Malta government debt into €5 banknotes and put these head to head, the row of bank notes would stretch 3.5 times around the Earth (138,838km). Impressive, is it not? We can call this the Debt-to-Earth ratio.

The size of the national debt is quite revealing as a measure of the quality of public governance. Government borrowing may make sense if kept to a much lower limit and used to create and maintain a sustainable economy that not only ensures private sector jobs and enterprise and adequate welfare for its citizens, but also takes in consideration quality of life, future generations and the protection and restoration of nature. While it is true that we find ourselves today in a situation of private sector virtual full employment, it would be wrong to assume that this is largely linked to government spending.

In 2015, government compensation of its 45,000 employees cost €1.12 billion. This gives us an average cost to the government of €25,000 annually per employee. Both the number and the cost seem on the high side to me. The expedient of unnecessary government jobs in order to buy votes is a perennial problem in Malta and a burden on taxpayers.

How much does the EU really cost us? As far as I can see, Malta’s contribution to the EU budget for 2015 was €104.2 million. This is calculated as percentages on our (a) customs duties (b) VAT revenues, and (c) gross national income. So it goes up (or down) with the size of our eco­nomy.

If you had to translate the Malta government debt into €5 banknotes and put these head to head, the row of bank notes would stretch 3.5 times around the Earth

What are all the other costs to Malta that are directly or indirectly attributable to being an EU and euro area member State? How much of government and Opposition time is spent on EU, rather than national, matters? How much has bailing out Greece and the other bankrupt euro area member States cost us? We need to know these numbers so that we can make informed choices.

We have yet another election campaign on our doorstep. If I remember correctly, before the last election the ‘votes’ auction raised a promise-to-spend of €750 million from the Reds and of €1.2 billion from the Blues. The government has just announced they will not be going on a “spending spree”. We shall see. It is obviously far better for a country to competently manage its prosperity rather than being forced to go with a begging bowl to Europe.

The problem with accumulating debt is that it has a ‘tipping point’. Beyond the tipping point the debt and the interest costs spiral upwards and tax revenues spiral downwards. This is an unforgiving and vicious cycle.

The following is a simplistic sensitivity analysis on Malta’s debt designed to make a point. Let us assume that Malta’s national output remains constant in 2017 and that from 2018 it starts to regress to the same levels of previous years so that in 2020 we have the same national output as 2013.

Without any reductions in expenditure, government debt would rocket to well over €7 billion.

This would create a debt-to-national output ratio of over 90 per cent, as tax revenues drop and borrowing necessarily increases. In just over three years from today we would be on our way to becoming the next Greece. This is just to demonstrate how quickly things can change once a country hits the tipping point.

Portugal, Spain, Ireland, Cyprus and Greece reached their tipping point and had to be bailed out by us and other euro area member States. Another two euro area countries, Italy and France, may be at the tipping point with a debt of €2.2 trillion each and a debt-to-national output ratio of 132 per cent and 96 per cent respectively, with practically static tax revenues.

The stark truth is that, whereas national output may go up or down, national debt only goes up, unless it is repaid.

We have just learnt that the government anticipates a surplus of general government revenue over expenditure for 2016. This is good news. My personal opinion is that we have only our Finance Minister to thank for this. Although national debt has gone up in 2016 by an odd €160 million, we should now expect an annual downward trend in absolute terms as from 2017.

We have been interestingly informed that running the economy on surpluses would “reduce pressure to increase taxes”. Really, increase taxes! Pressure from who exactly? If anything, surpluses should allow the government to decrease taxes on companies and individual taxpayers. We are also told that as we now have so much money “this would help Malta move forward on large infrastructural projects... such as the Gozo tunnel”.

It would appear that, no matter how good we get it, we are still hell bent on squandering it. My suggestion would be to use promised surpluses to form a sovereign fund for future generations and for the creation of a truly sustainable economy and not an economy fuelled by government spending.

­1) Figures are not adjusted for purchasing power parity;

2) 1987 debt attributed fully to Reds;

3) There may be a 3 to 6 month mismatch between the national debt date and election month in year of change in administration;

4) December 1987: Debt = €202m; Debt-to-GDP ratio = 16%;

5) September 2016: Debt = €5,8bn; Debt-to-GDP ratio = 60%;

6) Sources: CBM Quarterly Reviews, NSO, Europa website & Malta Economic Survey Oct 2015.

David Marinelli is a family business owner and CEO of Portman International – a Maltese financial services company.

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