Fitch wants austerity: but this is no gospel truth

So credit rating agency Fitch has dropped Malta's credit rating from top rung 'A+' to 'A', especially because of a deficit increase which could go up to 3.6% by year end and a related increase in public debt which is hovering around the 90% mark.

Fitch has warned that ratings could worsen unless state-owned enterprises are restructured, reducing the government's guarantees for these public companies' debts.

The political reactions to Fitch's opinion range from parties blaming each other for current or previous administrations, to mere repetition of Fitch's recommendations. I will not enter into the partisan merits of such theatrics. What should concern us is that we are a few weeks away from Malta's budget for next year.

Though Fitch is technically correct in its concern on Malta's deteriorating public finances, this does not mean that its neo-liberal recommendations are some gospel truth.

Fitch is speaking against what it calls an 'expansionary budget'. In simple words, this is a call for austerity measures. In my reading, such measures usually hit hardest those with lower-class positions, those in precarious employment, and those who are somewhere close to the poverty line.

One needn't look very far away to see the negative impact of policies which aim to curtail the so-call 'expansionary budget'.

Indeed, while I agree that certain areas in the public sector are ripe for reform, Malta should avoid the austerity approach.

Government should adopt an expansionary approach in areas such as education, health, social welfare and the environment. These can create jobs - for example green jobs in energy - and can also result in persons who are better equipped to meet the opportunities and risks of contemporary society.

If one takes education, expenditure in areas such as school maintenance result in safer and more accessible schools, but also create jobs in the process. Expenditure in research, scholarships and other educational initiatives has obvious social and economic advantages, not least including making Malta more attractive for investment in employment with high value added.
Such an approach can have a multiplier effect which helps enable economic growth and generate revenue for public finance, and can also have other benefits such as increased energy efficiency, less social inequalities and more social cohesion. 

Besides, Malta's maximum income tax rate should go back to 35% to provide the necessary finances for public expenditure. The 35% rate represented a hegemonic, historic compromise between different social and political actors, and was much lower than maximum tax rates of other EU member states, especially of those which have universal social services and excellent public services.

I do not think that this tax rate acted as a disincentive to economic initiative, even though it characterized populist fiscal discourse.
Opinions of agencies such as Fitch are important barometers for Malta's economic policies. But this does not mean that Malta should simply act as the parrot of such neo-liberal institutions.