The Big Billboards Flop

Michael Harrington, a great American socialist, used to say that if you wanted to solve the problem of low incomes, you should try providing money. A piece of common sense, but if anyone doubted the soundness of this recommendation, those doubts should be dispelled by a look at the poverty rates last year.

According to the International Monetary Fund, the COVID-19 pandemic prompted an unprecedented fiscal response worldwide to support health systems and provide lifelines to vulnerable households and firms. Fiscal measures announced during the pandemic, are estimated at $11.7 trillion globally, or close to 12% of global GDP.

The fiscal response, coupled with the sharp decline in output and government revenue, will push public debt to levels close to 100% of GDP in 2020 globally, the highest ever. Central banks in several advanced economies, including the ECB in the EU, facilitated the fiscal response by directly or indirectly financing large portions of their country’s debt buildup.

Comparing Malta’s response to that in the EU, we ran a larger deficit than the EU with a magnitude in percentage points increase over 2019 which was just over three times. But our increase in public debt was only 12.7 p.p. versus 18.2 p.p. in the EU, such that debt as a percentage of GDP was in the mid-fifties versus 90% in the EU.

On the whole, the massive fiscal support undertaken since the start of the COVID-19 crisis saved lives and livelihoods. Public health policies that contained the spread of the disease were particularly effective because they also supported the recovery by restoring confidence and permitting a safe reopening of activity. Cash transfers were vital for the poor, who spent them largely on necessities. Unemployment benefits supported consumption for people who lost their main source of income.

The IMF, OECD, the European Commission, and the Central Bank of Europe all exhorted this response and lauded the ability of governments to prevent another Great Depression.

But the Opposition PN in Malta, which at the start of the pandemic heavily criticised the Government for a few days’ delay in announcing certain economic measures, is now excoriating it for running a big deficit. 

Over eight years in both cases, the PN ran a cumulative deficit of 33.7% of GDP, while the PL’s deficit total was 18.1%.

The self-induced frenzy of an early election, talked up by the PN and its friendly media, made them lose it completely. The party of the government which ran an annual average deficit of 3.7% for 10 successive years said it was the height of irresponsibility for the PL Government to run an average annual deficit of 2.1% for eight years (and that’s including 2020). Just to put it in perspective over eight years in both cases, the PN ran a cumulative deficit of 33.7% of GDP, while the PL’s deficit total was 18.1%.

No wonder, the billboard campaign flopped and lost the PN a couple thousand more votes. It’s not pleasant to see a party inflict such damage on itself, when it was rearing to go for an election. The Prime Minister appeared to do it a big favour when he pulled the carpet from under the PN, though in practice extended its agony by a few more months. 

Back to the pandemic, beginning in March of last year, the pandemic sent unemployment soaring, faster than it’s ever grown before, and to rates not seen at least since the recession of 1981. But not in Malta. Employment rates receded. But not in Malta.

The truth is that the overall economy didn’t plunge to Great Depression levels in 2020, and the share of Maltese living in poverty, rather amazingly, was actually lower than the share living in poverty in 2019. 

And that’s entirely because the government addressed the problem of abruptly lower incomes with money. Extended unemployment benefits, consumer vouchers, job support measures, amongst others, ensured that monetary poverty in Malta would decrease to 16.9% of the population from 17.1% pre-pandemic, whilst the at risk of poverty and social exclusion rate also declined from 20.8% pre-pandemic to 20.8% in 2020. This contrasted with the EU situation, where the trends were negative in both measures.

No wonder, the billboard campaign flopped and lost the PN a couple thousand more votes.

Going forward: not ‘business as usual’

While the COVID economic recession has been contained and recovery is well underway, there has to be a rethink of tax and spending policies. While current interest payments on public debt are manageable, due to low bond yields and accommodative monetary policy, maintaining a high debt increases vulnerability to interest rate increases and growth slowdowns, and raises debt rollover risks.

Today, the Maltese economy is in the recovery phase where it will be essential to create the conditions for robust, resilient and inclusive economic growth, which will in turn support government finances in the future.

A return to “business as usual” will not suffice. Even before COVID, Malta was facing many long-term structural trends, such as climate change, population ageing, the acceleration of digitalisation and automation, the slowdown in economic growth, as well as rising inequality. These challenges will require a mix of tax and spending policies, within a fiscal framework that accommodates increased financing needs and higher average debt levels.

In adapting our tax policies, we should put growth, equity and sustainability on an equal footing. Moreover, it will be increasingly important to assure the sustainability of the tax system. An improved design of individual taxes is essential, but it is not sufficient on its own and there needs to be a coherent “tax systems” approach.

Tax coherence is also vital to cope with the changing economic landscape (e.g. a marked productivity slowdown, the growing relevance of intangible assets, and increased digitalisation). So, business taxes should take into account the heterogeneous response of firms to taxation and, in particular, to tax instruments going beyond the statutory rate such as capital allowances. Because innovation and productivity diffusion are so crucial, the tax system should stimulate investment in research and development, and related activities, especially those targeting young, small and low-productivity firms.

I might be out on a limb, but I really believe that, given evidence on the relatively modest growth impact, increasing taxes on capital income at the personal level could be reconsidered. Finally, Malta should build upon the lessons learned from other countries’ experiences in improving the effective collection of VAT on the online sales of goods, services and digital products.

Again, this might not be too popular with today’s crop of Labour politicians, but I am not alone in thinking that exploiting new or under-utilised sources of tax revenue could be compatible with inequality reduction objectives. Taxes on personal capital income and property, with a focus on top income and wealth, should play a bigger role in the future.

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