[ANALYSIS] How Muscat ditched Robin Hood without forgetting the poor

Budget 2017 crystallizes Joseph Muscat’s economic vision: state intervention to distribute wealth, without harming business interests. What is the Prime Minister thinking?

Joseph Muscat has managed to create a coherent political narrative, which reconciles limited and targeted State intervention through top-ups for low-income earners without punishing the drivers of economic growth
Joseph Muscat has managed to create a coherent political narrative, which reconciles limited and targeted State intervention through top-ups for low-income earners without punishing the drivers of economic growth

Prime Minister Joseph Muscat has relied on the State to subsidise the income of vulnerable categories of people through in-work benefits and rental subsidies, steering away from austerity politics or being totally reliant on the trickle-down effect: which expects the poor to scrounge for left-overs falling from the tables of the everlasting rich men’s buffet.

Instead Muscat – a social democrat but inveterate pro-business believer – prefers a system where the rich can party on, while the State actively intervenes by topping up incomes to avoid resentment and “envy” among the poor. 

This is why Muscat shies away from redistributive measures that would directly redistribute wealth from the rich to the less well off. For the long-term sustainability of these measures relies on the continued economic growth of sectors like construction and real estate, which themselves may well continue to erode everybody’s quality of life and the environment. But in this way Muscat makes everyone a stakeholder in an unequal economy that is driven by profit, while ensuring that nobody feels completely left alone. Muscat reaps a political dividend: those on the receiving end of benefits remain grateful. Indeed, State paternalism can be more politically rewarding than rent controls or an increase in the minimum wage, today almost anathema for the business class.

Strengths of a narrative

Surely Muscat has managed to create a coherent political narrative, which reconciles limited and targeted State intervention through top-ups for low-income earners without punishing the drivers of economic growth.  

In this way Muscat can continue projecting himself as being pro-business without losing his social conscience (he calls it ‘prosperity with a purpose’). The government relies, as expected, heavily on more indirect taxation such as the excise on non-alcoholic beverages (almost €1 million in excise, and €600,000 from chewing gum excise), which hits rich and poor alike to generate its revenue. While excise is raised on cement and construction prefab concrete, Muscat can offer a reduction in stamp duty to whet the market’s appetite to sell off housing stock.

All this retains whiffs of Tony Blair’s third way and Eddie Fenech Adami’s Christian-democrat model, but Muscat’s narrative is always geared to make his electoral bloc gel – both working class and business interests seemingly partaking from one large cake.

A quandary for Busuttil

It is a narrative that puts the Nationalist opposition in a quandary. For as a centrist party it is reluctant to support more radical measures like rent control and an increase in the minimum wage. Instead the Opposition has jumped the gun by calling for reductions in electricity bills. While such a call may exploit a rift between small businesses and the interests of big energy companies like ElectroGas and Shangai Electric Power, it may fail to resonate in a context where energy bills have actually decreased in the past three years.

In this Muscat was incredibly lucky, benefitting from a collapse in international oil prices. Busuttil’s reaction showed that he is tapping into all niches which may be disenchanted by Labour policies, ranging from the traditional Labour voter to small businesses, but he has so far not managed to convey an alternative narrative to Muscat’s – which is not an easy task when considering that the economy is doing so well.

Structural weaknesses

In reality Muscat’s business model depends on the current conjuncture of low energy prices and continued growth of the construction, real estate, tourism, financial services and gaming sectors. It is a propitious alignment of the stars for Labour. No wonder the government continues to fuel the construction boom through new measures like tax exemptions on property acquisition in Gozo.

Bizarrely, the new tax on non-alcoholic beverages – expressly labelled as “not being a sugar tax” by Muscat – exempts the mineral water that is being extracted for free from public groundwater sources and now even given for free in supermarkets for large purchases. On one hand, the nanny state ‘penalises’ consumers of beverages that may (or may not) include sugar with a higher excise tax and fines motorists smoking inside cars carrying children; on the other hand, big business that extracts water from the national groundwater resource is not charged or controlled.

Clearly, the message is that any upset in the sectors currently driving economic growth could endanger the sustainability of top-ups for low-income earners. This ultimately makes us more dependent on the undesirable consequences of economic growth, namely endless construction, heavier congestion and traffic and growing inequalities of wealth.   

Even when it comes to rents the government will be increasing rent subsidies in a way which may well end up lining the pockets of property owners, who have no incentive to reduce rents. The subsidies will be inflationary without effective controls. But Muscat also knows that Malta has a large number of property owners who benefit from such policies.

In this way Muscat has found a way of keeping everyone happy by dishing out more state cash. Muscat can get away with this (along with the rising cost of rampant cronyism) for the simple and important reason that the government deficit remains in control: who needs austerity when the country’s finances are in a good state?

But is this sustainable in the long term? Does Muscat risk fostering new dependencies by shifting all social costs on to the state?

Moreover inflation, which is driven by the influx of highly-paid, skilled foreign labour whose demand to live in gentrified areas drives up property prices, may well further erode the purchasing power of low-income earners or a part of the middle class. A €4 weekly increase for minimum wage earners through top-ups may well not be able to compensate for rising costs.

Socialising labour costs

What the government is effectively doing through top-ups is to socialise part of the employers’ labour costs, freeing up employers and business from the obligation to provide decent living conditions for workers. One advantage of this is that businesses relying on cheaper labour will not suffer from higher labour costs, remaining competitive while the economy still benefits from the multiplier effect of increased spending by lower-income groups.

The catch is that the current phase of economic growth will not be reflected in an increase in Maltese wages. For if the minimum wage had to be increased, it would trigger a domino effect on wages in general. One major structural weakness is that top-ups are not reflected in future pension earnings, which creates a greater risk of impoverishment at old age.

Expecting low-income earners to spend their top-ups in private pension funds, as suggested by Finance Minister Edward Scicluna, is ludicrous. And the government’s refusal to introduce a compulsory second pension pillar, suggests that for Muscat electoral cycles are more important than the long-term sustainability of current living standards.

More in Budget 2017