ANALYSIS: Progressive policies drive Government revenue up by half a billion

Despite the pandemic and the restrictions introduced to control its spread, Government revenue was more than half a billion Euros better than the same months of 2020.

In particular, tax revenues have grown sharply. VAT revenue increased by €125 million, income tax revenue was up a whopping €284 million while social security contributions were €113 million higher. These are larger revenues not only when compared to 2020, but even higher than in 2019.

Government revenue figures for the first seven months of 2021 show that the return from the progressive economic policies which the government adopted during one of the most devastating economic crises in history is very rapid. Not only were families and businesses able to repay the taxes deferred from last year, but they are also even paying more taxes now because their incomes were safeguarded by government assistance and the economy has recovered.

Government recurrent expenditure in the first seven months of 2021, at €3.1 billion is the highest ever recorded, as the administration continued to devote more resources to the public health system, and to support those parts of the economy that are still facing low external demand. Recurrent expenditure in 2021 is three times that in the same months of 2009. This is why instead of taking 72 months to have unemployment fall back to pre-crisis levels as in 2008, this time round it has taken just 16 months for unemployment to reach a record low.

Recurrent expenditure in 2021 is three times that in the same months of 2009.

At the same time, besides looking to safeguard the economy in the short-term, Government is not losing sight of its medium to long-term plans. In the first seven months of this year, it has continued its ambitious infrastructure investment plans, as well as several projects to strengthen the health service. So much so that Government has spent €323 million on capital projects or 15% more than in 2019, before the pandemic. Again, the exact opposite of what the Gonzi administration had done – when it had cut public capital spending.

Contrasting past economic policies

Faced by the financial crisis of 2008, the Gonzi administration went into panic mode. Having overspent heavily before the general election, it had little room for maneuver. The only available option PN strategists thought was to blame the international crisis, adopt austerity politics and wish for the best. 

Today, we know that that choice was the beginning of the end for the Nationalist government. The public did not buy the excuse of the international conditions, just as they had not believed it in the early 1980s when our economy had also faced economic troubles and Government (then Labour-led) had adopted austerity. At the same time, austerity did not solve Malta’s economic woes, so much so that by 2012, the deficit was higher than it was in 2008. The rise in unemployment in mid-2008 did not dissipate before 2016 – six years lost for thousands of families.

Barely a month in, the Abela administration faced a much more serious economic shock than the 2008 crisis. It was true that contrasted to back then, public coffers were in a much better state having had several years of surplus. However, the temptation to go for austerity again must have been strong. Some argued that the shock was so strong that Government needed to be careful and look after its own financial needs first and foremost. The Nationalist Opposition argued that Labour was over-spending and that the deficit would remain too high. In his first official speech as Leader of the Opposition, Dr Bernard Grech had called Government’s budget projections as a virtual reality exercise, arguing there was no way that revenue could rise as was forecast. 

The virtual reality is quickly proving to be quite real. Official data indicate that Government recorded a deficit improvement in its Consolidated Fund of €169 million in the first seven months of the year compared to the same period a year ago. 

The PN strategists still seem to believe that austerity politics make sense. 

The Labour Government recipe to increase government spending in times of recession has worked. This increase generated the tax base which will keep public finances in order. Progressive policies make perfect economic sense.

Advocating the return to pre-2013 economic policies is a sure ticket back to lower prosperity, higher inflation and unsustainable public finances.

 

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