Wanted: a recovery plan on steroids

It is not easy to laud the efficacy of the mini budget unless one sees the figures in perspective. It appears that the stimulus will cost around €900 million and the deficit will reach 7.5% of GDP by end of 2020.

According to macroeconomic forecasts, the government is predicting that Malta’s GDP will shrink by 5.4% in 2020 and increase again by 3.9% next year.

In perspective, this contrasts with the austerity budget launched by the Nationalists party in the wake of the financial crisis when in 2009 we registered a recession. In the latter budget the belt tightening was principally on ratcheting high water and electricity and fuel charges.

In 2009, unemployment was kept in check mainly by directly funding the wage bills of selected large-scale employers by the government. Naturally, nothing compares with the global recession caused by the pandemic which originated last December in Wuhan China.

This virus has spread like wildfire in a few months, crippling the global economy and leaving many persons dead. The constituted bodies had pleaded with the government to dig deep in its reserves and their wishes were heard as more than €2 billion were borrowed in government bonds - pushing the total deficit close to €7.5 billion.

Be that as it may, the patient needs all the help and encouragement to stand up and start walking. The mini budget announced this week is a bold one and is well designed to stimulate demand. It takes a calculated risk that there will not be a second vicious wave of Covid attacks.

For example, fears of a second wave of the coronavirus might push consumers to save, despite government incentives to spend, while companies might be tempted to sack idle workers regardless of the offer of a wage supplement (now extended by three months).

Starting with the demand boosting idea of giving 260,000 voters vouchers each worth €100 which can be cashed in restaurants and other shops is a cool way to promote single diners sporting a treat of a gourmet pizza, wine and coffee. Obviously, a better idea is to reduce VAT on dining as Germany just did, knowing the tax evasion in Malta is a national sport. any reduction in vat rate on catering will be recouped by a better fiscal morality.

The drop of roughly 2% on petrol and diesel prices is very welcome albeit international oil price fell by over 50%. But of course, as tax on fuel is a primary source of state revenue, one thanks heaven for little mercies. For the developers’ lobby, the going was good as anyone buying property up to €400,000, the current 5% duty will drop to 1.5%. For the sellers, the 8% duty will drop to 5%. This works out at a maximum of €26,000 saving in tax per each transaction. It will cost the government some €32 million.

More good news for the first-time buyers scheme, as this will also be adjusted so that those who had bought a garage would still be eligible. In-work benefits will also be improved for low-income families. Married couples who faced disruption and wasted costs due to COVID-19, can claim a compensation of up to €2,000. The mini budget also set aside a €3 million fund to help NGOs, whose income was severely hit by the impact of COVID-19, plus €2 million will be allocated to homes of the elderly.

The truth is that with the ports and airport reopening in three weeks time, one hopes that the arrival of adventurous tourists will again grace our shores and regenerate the hospitality sector (MHRA expects a full recovery may take two to three years to reach the three million mark - a 2019 trophy).

The boldness of this latest recovery plan is pennies from heaven. For countries around the world already facing serious COVID-19 outbreaks, the solidarity, compassion and collaboration of local entrepreneurs that we are witnessing are a testament to the power of local resiliency. The official records show a mere 4,000 unemployed in Malta.

As a general note, for government and businesses, combining bold strategies may be their best chance of getting the economy going again. Which aspects they start first, between opening schools, airports, ports, workplaces, shops and restaurants, should be a country-by-country choice.

But in Malta’s case, there has been a courageous gang whose attitude that fortune favors the brave. We will only be able to get out of this crisis together. If we fail to help each other, we risk a serious relapse, making the recipe for a crisis turn into a depression.

Ultimately it should be clear: the only long-term strategy to eradicate this virus is a COVID drug and/or vaccine. This type of development supposes that one has at least a few dozens of research universities that work very well in vitro and testing first on animal models, followed (if successful) on patients.

Given this knowledge, we shouldn’t plan for an economic and social recovery in under a year, simply out of hope. In parallel, preliminary work has started in some European countries on what the next phase of recovery will look like and the role of strong public action in boosting demand, providing replacement income, and facilitating new investments. A successful recovery phase can help build prosperity and resilience, by contributing to the long-term potential and sustainability of Malta’s development pathway.

There are encouraging signs from some countries – including China, Germany, and South Korea – that are also looking at green elements as part of their recovery. Taking Berlin as a model country which is in recession, it announced a vigorous stimulus programme last week.

Among the planned initiatives, one stands out in particular: the decision to reduce VAT by three points until the end of 2020. It takes nerves of steel for a government to concede some €20 billion in tax revenue. It is no small feat. The new measure marks a significant shift in mentality at the very top in what Céline Antonin, a specialist in the German economy at the French Observatory of Economic Conjunctures, said represents “a shift in Germany’s economic paradigm”.

Malta never dared to reduce consumption taxes or accede to introduce a lower corporate tax for SME’s. By contrast, Berlin’s bold move to reduce VAT reflects the government dedication to regenerate demand. “It is a simple and direct way to encourage individuals to start consuming again, quickly”, explained Pascal de Lima, chief economist at the financial consulting firm Harwell Management.

This stimulus is combined with other measures – such as paying each household €300 per child or extending short-term work contracts. Critics disagree by saying that it is risky to lower the VAT when tax evasion is low.

It goes without saying that it is imperative that leaders increase resiliency. To do so, governments must gain public trust in order to act effectively and efficiently, and ideally the private sector must work with governments to ensure local preparedness and response.

Another way to increase resiliency is for civil society to be a watchdog on corruption, cronyism, wastefulness, excessive bureaucracy and poor governance.