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Edward Scicluna | ‘You cannot fight the market’

Finance Minister Edward Scicluna defends Budget 2017 from criticism that avoided taking necessary social intervention measures such as rent control or an increase to the minimum wage

raphael_vassallo
Raphael Vassallo
30 October 2016, 8:59am
Last updated on 31 October 2016, 8:29am
Finance minister Edward Scicluna
Finance minister Edward Scicluna
If ever there was a job to which the old saying ‘you can never win’ applies, surely it would have to be the Minister of Finance. Traditionally, as the man who holds the key to the national treasury, he is inundated with pressure from Cabinet colleagues demanding ever-increasing allocations. And once the annual Budget exercise is complete and presented to the public, it is the Finance Minister who must bear the brunt of popular outrage at unpopular decisions.

To be fair, the job has its perks. In times of economic health – when international credit ratings agencies upgrade Malta, and the Budget delivers more ‘goodies’ than nasty surprises – it is generally the Finance Minister who takes all the credit.

From both perspectives, Budget 2017 seems to pose a slight departure from the script. The government touted it as an exercise in social responsibility... a Budget that ‘left no one behind’. The social partners by and large agreed... but while welcoming the more generous social initiatives – such as a doubling of the rental subsidy to low-income earners, or the ‘extra’ increase of COLA (cost of living adjustment) to €1.75 – many of the reactions also indicated disappointment that they did not go far enough.

Caritas and NGOs such as the Anti-Poverty Alliance have reiterated calls for an increase to the minimum wage. In particular, the rental subsidy measure was singled out for criticism on the ground that it might jack up rental prices.

It seems a good place to start when I meet Prof. Edward Scicluna for this interview. Apart from the possible inflationary effect on the rental market, other measures such as the conversion of the Eco Contribution to an excise tax are likely to be passed on to the consumer as higher prices. Given that Caritas is already warning that minimum wage earners can’t afford basic necessities at current prices... isn’t there the danger of inadvertently causing more poverty through Budget 2017?

“You’re joking, right?” Scicluna begins. “We calculated the effect of the eco contribution as an excise tax, and it roughly translates into 6c per person per year. That this might cause an inflationary spiral is absurd. Inflation has never been lower in our whole lifetimes. And it’s not all thanks to us; I’m not taking credit for it. It’s a worldwide phenomenon. In fact, our concern and fear was deflation. I still remember having meetings in here, seeing whether prices would follow a deflationary spiral like they had on the continent. But they didn’t. We’re currently under 1%, and it’s been like that for a few months now...”

All the same prices are increasing, even if by little. The question becomes, are salaries increasing in step? If the minimum wage hasn’t gone up but prices have, those people are still on a downward trajectory...

“What do you mean, the minimum wage has not gone up? Sorry, but it has. The agreement was that it would go up by what Eurostat, etc, determined the prices went up by last year... and it was found to be €1.16c. The government went a step further, and said ‘let’s round it at €1.75.”

But that’s the Cost of Living Adjustment. It’s not an actual increase to the base minimum wage itself.

“It still gets added to the salary. Bear in mind that these are not government salaries. The government has no minimum wage employees. It’s the private sector; it’s the market. In this market, with the current levels of competition, that’s how much they can afford. If workers are truly underpaid, they can move to another enterprise. Did you know that in Italy there is no minimum wage? In Britain, it was only introduced under Blair in the 1990s. So what? There is life without a minimum wage. It’s a government intrusion...”

Is he suggesting that a Labour government has no business to be intruding into the labour market?

“It is better to have a living wage... by that, I mean a benchmark to aim for. For example, a family with two kids should earn that benchmark; that’s the living wage. Are they earning it? If the answer is no, society must adjust. Let me refer you to a recent Misco study, which found that wages are increasing by slightly more than 5%. Who dictated that? The government? No: it depends on other factors such as productivity. Now: if the government is to intervene to help low income brackets... should it intervene by legislating so that the private sector must pay all employees the salary of a family with two kids?”

That last part is an assumption... what Caritas suggested was that minimum wage earners should earn enough to enjoy a decent standard of living. And the request must also be seen in the context of sky-rocketing living costs. Rent, for instance. We just carried a story about how rental prices in Sliema have increased by 80%. And according to the Anti-Poverty Alliance, you won’t get an apartment anywhere for less than €400 a month. How can someone on the minimum wage afford that?

“Eighty per cent of households in Malta own their property. Their concern is more with the interest on mortgages than with rent. It is a big problem for those who are affected by it, but it’s not a national problem. Most of the tenants are foreign; it’s a very small segment who don’t own property and have to rent. Is that a concern for the government? Yes it is a concern...”

This brings us to a more specific Budget measure. The government has doubled the rental subsidies... while stopping short of actually regulating the rental market. Admittedly it is a controversial proposal, among people who treasure the free market economic model... but given the rate at which rental prices seem to be spiralling out of control: aren’t there valid economic reasons for the government to intervene?

“The only remedy is increasing supply, not rent control. You cannot fight the market; you have to address it, manage it... but you cannot fight it. If the pressure is up... Ok, you decide that, from tomorrow, landlords can charge no more than €300 a month. What would happen? I lived it. To get a contract for two years, you would have to pay €5,000 up front, Why? For ‘the furniture’. That’s how the pressure works. So the response is to let the supply take care of it. I’m not sure how many of the plans of new developments will actually materialise; but they will surely increase the supply...”

On paper, that’s how it should work. But Malta’s property market seems to defy the economic law of demand and supply. For instance: has the supply of property gone up over the past year?

“I would say it has.”

Then why haven’t the prices come down? They’ve actually done the opposite...

“Because the demand is increasing at a greater rate than the supply.”

Is that really the case, however? People in the property market are questioning whether there is enough demand for new luxury apartments. And that’s another thing: it is the supply of top-end residential units that is increasing.  The demand is fuelled by people who can afford to pay over a million euros for an apartment. There is even a government policy to attract this sort of client. Doesn’t this distort the market slightly?

“Let’s take it one step at a time. If we want to protect housing up to a certain value... we can. Whatever you promote and give incentives for, you should not include those types of properties, in order to protect them. But you can’t promote Malta internationally, and at the same time, not expect rents to increase...”

Precisely. Some might also expect the government to step in, if the rental increase gets out of hand. Scicluna however dismisses rent control as a possibility.

“Ideally, you support incomes. And then let the beneficiary decide how to allocate that money. The Caritas report, for instance, talked about food prices. Does that mean we should intervene to control food prices? We can’t. It is a question of the cost of importing cereals, sugar, etc. As a small, open economy, we’re at the mercy of those prices. Now: if there are people at the lower levels who can’t cope... because the people in the middle and at the top, having incomes increasing by 4% or 5% according to that Misco study... they can afford a 3% or 4% hike in food prices. It’s the lower income bracket that struggles. We have to address their income, not the price of food...”

Scicluna insists that his job, as finance minister, is not to dictate to the market, but to distribute the wealth fairly.

“You have to let the market function, but then you have to look at the whole picture. You have to decide: do you like what you see? Is it improving, or not? That is my white board. I look at that, and I’d be concerned if [poverty] goes up on my watch. So far – and I can prove this through various studies – all our policies from day one have been redistributive. Except for the 35% income tax cut, all the social measures and benefits hit the low end more than the top end. The result was that in 2013, the Eurostat indicator for poverty stabilised; in 2014, it went down. In 2016 and 2017, I can assure it will continue going down.”

To be fair, it is not the performance of the economy that is being questioned. But now that Scicluna raises the issue, we must also consider the cost of this progress. The social measures introduced by Labour in this Budget – including the rental subsidies – are all funded by the taxpayer, as is the entire welfare system itself. By refusing to regulate the market, the government is constantly increasing its own expenditure... while private enterprises posting untold profits enjoy generous tax statuses. How sustainable is this in the long-term?

“I would say that is the only real function of the government. If the government fails that, it fails at being a government. OK, unless you subscribe – as I know you don’t – to the extreme rightwing view that governments should only be responsible for law and order. But government acts like an insurance agency in all other things. Not just for the poor, but for everybody. I’m not in the low income bracket; but I could be hit by sickness or disability, or lose employment, or retire. All these things – except retirement, which is associated with an age bracket – are unpredictable. The government is the insurance agency; you pay the premium, in the form of taxes, and you can make claims. If you have kids, you can claim children’s allowance. It’s not begging or giving... you have a right to claim it. These are not handouts, just as an insurance payout is not a handout. This is the latest model. In the past, we talked of the welfare state as ‘helping the poor’. Today we realise it’s not just for the poor. The government acts as an insurer for the middle income sector... the entire country. Is it sustainable? Is an insurance agency sustainable?”

Insurance is indeed a very profitable line of business... but it’s still a private business. If a private insurer is hit by multiple claims and can’t pay out, generally speaking he goes under. It’s not the same with governments...

“True. There is another difference. If you’re sick, an insurer can refuse to sell you a policy. He can tell you to go somewhere else. The government can’t do that... and of course it shouldn’t.”

On a separate note, the sustainability question has been asked in other forms. In its official response to the budget, the Opposition complained that it ‘had no long-term vision’. The government failed, the PN said, in attracting enough new investment and revenue streams. It was still too reliant on sectors such as I-gaming, introduced by the Nationalists...

“My first comment to that is, it’s really surprising – no, not surprising. It’s really sad that, once you’re in a certain position, you see things differently. In certain ways, you see things very clearly; in some ways, somehow... you see investment coming, but for different reasons – one, because it’s Chinese, and you don’t want the Chinese touching your switch; then you get Jordanians who are not so photogenic, and so on. You don’t see the wood for the trees. When I’m in Washington with the ratings agencies, comparing all this to other countries... we all see it. But the Opposition can’t see it.  [...] Whether it’s health, whether it’s education, whether it’s logistics, whether it’s a slight extension of the manufacturing sector, pharmaceuticals... there is diversification going on all the time. Shipping, diving, yachting...”

He trails off into a plethora of other areas, including the film industry and the English language schools sector. But while this may be undeniable, the question of over-reliance remains a valid one. The presence of I-gaming and financial services depend on favourable tax regimes. By definition, this makes them unreliable... as anyone offering more favourable conditions can attract them away.

Isn’t the PN partly right, then, when it says we depend too much on those sectors?

“Malta is attractive to foreign investment not just because of taxation. We have certain qualities in the service industry. We’re commercial people by birthright. Industries and businesses are here for many reasons other than tax; tax is important. We have to remain competitive...”

How can we be so certain that we will, though? As we speak, the European Union is debating whether to introduce fiscal harmonisation across the Union. Both Labour and PN oppose this on grounds of tax competitiveness, but that’s not going to be enough to block the measure (unless Malta resorts to a Veto, of course)...

“The harmonisation is about bases, not rates. I have the assurance of the OECD, even the Commission, that they are not out to destroy our tax system. Only to ensure that it will not be abused by other countries. I have discussed this with European finance ministers, and will continue to do so: we have certain advantages, we are peripheral... we are not a high tax country like Germany or France... our economy is more sensitive to competition, and we want to remain competitive. However, we’re not going to connive for companies to practise double non-taxation, and avoid or evade tax. Definitely not. And they understand this. It’s like trade.  Point by point. You give this up, they give that up. That’s how it will happen. Through discussion we will reach an agreement. It will be hard. But we certainly won’t be waving around any vetoes...”

Scicluna closes with a warning against any portrayals of Malta’s economy as being ‘too reliant’ on any one sector. “Sectors such as financial services, I-gaming, and so on, are not hanging like a picture on a wobbly nail... so if the nail falls, the whole picture falls. It’s not so black-and-white.”

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