Explaining Clyde Caruana’s plan

There is a lot that can be discussed and analysed in the very brief interview with Minister for Finances Clyde Caruana. Not only does he clearly dissociate himself from the reckless expenditure of the government, but he also admits that he is powerless and that the Finance Ministry has been simply reduced to an accounting department that provides advice. This is not how the Finance Ministry operated in previous administrations which had very strong control and influence over budget expenditure and allocation of resources in order to keep public finances sustainable and secure, and also in line with EU guidelines. Robert Abela has taken away all the power the Finance Ministry had and concentrated it into his own hands.

Clyde Caruana doesn’t admit that the Finance Ministry has been stripped away from its power, but only says that the situation is so. He does however infer that Robert Abela is an imbecile and a populist dictator by comparing him to Viktor Orban. Clyde Caruana is also directly responsible for many economic issues we face including our cheap-labor model, although Clyde now says that this model is now defunct and Malta should look at creating jobs with higher salaries.

For a moment, let’s give Clyde Caruana the benefit of the doubt and believe in his intentions and plans. Let’s enter into his mind. He is a man deeply frustrated with what Robert Abela is doing and would like to address Malta’s fiscal problems but is powerless to do so by himself. His anger is so palpable that occasionally, he bursts out in violent anger, despite having a quiet demeanor most of the time.

Now, Clyde is betting that new EU guidelines on fiscal expenditure will bring Malta on track again and Robert Abela will have no other choice but to accept these guidelines. Is Clyde Caruana right on this?

Let’s put some context. Malta’s excessive and massive government spending has so far been propped up with debt that has been buoyed by the massive purchases of government debt made by the ECB in the past couple of years. As of the end of last year, the ECB has turned into a net seller of securities in its process of trimming the balance sheet and this selling includes government debt holdings. (I have tried downloading the ECB sheet with all its security holdings, however, the file is up to 400MB and I’m having problems opening it – If anyone can send the relevant screenshots, I would appreciate it). Clearly, the ECB shows that it stopped purchasing government bonds in July of this year and this includes Malta.

The ECB’s position will undoubtedly reduce demand for government debt in the primary and secondary markets, and coupled with high-interest rates, the issuance of government will be more expensive. The annual borrowing plan for Malta in 2023 is still high at €1.6 billion but the government will have to revise this because adding to the deficit and to the debt will put Malta under the EU’s fiscal control. The new EU guidelines state that once a member state’s budget deficit exceeds 3% and the debt-to-GDP exceeds 60%, the EU Commission would intervene with a technical committee to ensure that the member state’s budget is brought back to acceptable levels of sustainability. Malta’s budget deficit for 2022 was 5.8% and the debt-to-GDP ratio was at 53%. Given that the government exceeded the budget deficit but not the debt-to-GDP ratio, the government would still be obliged to collaborate with a technical committee to bring down the budget deficit.

This is not a new procedure because the EU’s excessive deficit budget procedure was already in place, but it was suspended with the Covid crisis and then with Russia’s invasion of Ukraine as the EU Commission relaxed budget and expenditure regulations. The ECB went on a very big buying spree to prop up debt markets and all of this is now coming to an end. As fiscal and monetary help is clawed back, EU governments have to find structural solutions to make their public finances more sustainable.

So, Clyde Caruana may stay on and attempt to bring fiscal responsibility to a reckless government with the help of the EU Commission and his staying on may actually be better instead of having an alternative Finance Minister who would be battling the EU Commission.  Of course, this depends on whether he is right and his the execution of his plan will be effective. Clyde may be able to force the government to wind down its debt issuance and by default decrease its expenditure, but what is trimmed from the budget will be another issue that Robert Abela may have yet again control of. It is obvious that when Clyde Caruana says that decisions are taken by the cabinet, he means that decisions are made by Robert Abela in front of his cabinet colleagues and with the backing of his band of corrupt idiots.

We’re still at a dangerous juncture. There is the risk they can still botch it up. Greece was known to fraudulently fake its accounts to the EU Commission prior to its crisis in 2010. So far, Clyde Caruana has to contend with a spineless permanent secretary, not of his own choosing, so he is rather alone in his battle. And definitely, he needs many friends in Brussels to back him up.