Is the 2021 budget an exercise in trickle-up economics?

By Kurt Xerri

Xerri is a member of Rethink, a social policy think tank.

The 2021 budget has targeted the first and hardest hit households.  The main objective was to avoid vulnerable communities ending up bearing the economic brunt of the crisis and prevent slippage into poverty levels.

The plan of supporting those categories by guaranteeing a basic income and lowering their tax burdens appears to be indicative of a radically new approach to public spending: that of trusting the ability of the lower and middle income households to drive and support the economy, or “trickle up economics”.

Lately, figures have not been encouraging.

The most recent Labour Force survey has indicated that the monthly basic salary of em-ployees in the second quarter of 2020 dropped by 8.6%, when compared to the previous year. Moreover, the number of average actual hours has gone down from 39.6 in April and June of 2019 to 34.1 in the same months in 2020.  This means people are both working and earning less.

The pandemic has, to a large extent, exposed the fragility of our social safety net.  The most illustrative example is the wage supplement scheme of €800, which exceeded the monthly minimum wage by €23.

In this respect, it may also be said that the pandemic has accelerated the effects generated by Malta’s rapid economic expansion, which was already resulting in increased difficulties for the lower-income categories and the noticeable falling behind of the lower-middle class.

Moreover, social inequality was characterised by a strong generational dimension. Among those facing the harshest consequences were the young, as it became obvious that they were inheriting an economic system which would not grow that rapidly for them, as it did for their parents and grandparents.

For these categories, the problems had started well-before the outbreak of the corona vi-rus pandemic.

Government appears to have now taken note of this reality, and is responding through a set of targeted measures which are mostly meant to avoid the worsening of the economic and social crisis.

The extension of the wage supplement and the income tax refund schemes will sustain those individuals who are at risk of losing their job, whilst the increase of the VAT exempt threshold from €20,000 to €30,000 and the broadening of the in-work-benefit scheme cri-teria (aimed to assist couples and single parents who are employed and have dependent children under the age of 23) are measures to prevent households from sinking into further economic hardship.

But should assistance be targeted solely towards the lower income-earning households?

Clearly, the difficulties are not limited to these groups.

The middle-class, which in Malta translates into all those individuals earning between €15,000 and €40,000, may also require support to maintain their economic weight.

Keeping the same lifestyle will be a challenge for individuals whose income has stagnated, particularly as costs of housing and education keep taking a large portion of their earnings (housing, by itself, may take up as much as one-third of disposable income).

Handouts for these categories, however, might prove to be both expensive and ineffective.

A solution for such income groups might lie in the provision of improved and better-quality public service, capable of reducing their overall costs and saving, as much as pos-sible, of their disposable income.   Future policies would, therefore, have to be targeted at providing affordable accommodation for the middle classes and raise the quality of public hospitals and schools.

The measure of dedicating €20 million in funding to ensure state schools adhere to COVID-19 protocols might be taken as a possible sign in this direction.

Of course, the strengthening of such public services requires a steady stream of fiscal rev-enue, which will inevitably be narrowed by the lowering of the tax burden on labour in-come.  The system will, therefore, come to depend much more on the taxing of capital gains, property and inheritance.

In this light, the measure to widen the tax-free threshold on inherited property and extend tax reductions on sale of property appear to be in conflict with the direction suggested by this budget.

The key fact, however, remains that the pandemic appears to have drawn our attention to the symptoms of inequality which had started manifesting themselves in the Maltese economy, even before the COVID-19 outbreak. In a way, these challenging times are giving us the opportunity to heal some of these chronic illnesses and enabling us to become a radically fairer and more sustainable society.