[ANALYSIS] Precarious resilience: What the budget says of the Muscat model

Joseph Muscat’s successful economic model gave Robert Abela breathing space in spending his way through the COVID-19 pandemic without taxing the rich. But is the model built on sand, asks JAMES DEBONO?

Robert Abela has managed to present a relatively generous budget which increases pensions and social benefits, and stimulates consumption during the COVID-19 pandemic through vouchers and tax refunds
Robert Abela has managed to present a relatively generous budget which increases pensions and social benefits, and stimulates consumption during the COVID-19 pandemic through vouchers and tax refunds

Robert Abela has managed to present a relatively generous budget which increases pensions and social benefits, stimulates consumption during the COVID-19 pandemic through vouchers and tax refunds, and retains the wage subsidies which have kept businesses afloat and jobs protected.

All this was achieved without imposing any new taxes, an ability which Labour now wears as a badge of pride, a mark of Maltese economic “exceptionalism” in a world where socialist parties are derided for tax-and-spend policies. Instead, Maltese Labour manages to spend more without taxing more. Even the General Workers Union congratulated the government for not increasing taxes. Contrast this with Spain, where the left-wing coalition’s response to COVID-19 was higher taxes on the wealthy.

So far it has been no additional pain for business and some gain for a wide section of the population, including pensioners and the disabled, albeit with some notable exceptions amongst those (mainly but not exclusively foreigners) exposed to high rents, dangerous and life-threatening work conditions, and low wages whose stories largely escape the official narrative.

All this was achieved thanks to a reduction in public debt in the wake of increased tax revenues generated by economic growth, thanks to population growth, spurts in construction and the sale of passports. In this way Malta can increase public debt again but well within safe fiscal limits, before the engine can accelerate again after the pandemic recedes.

The bubble... which won’t burst

It would be easy to deride this model as a bubble which is about to explode. The model, which balances neoliberalism in wealth creation and social democracy in wealth distribution, has proved resilient enough to enable Abela to navigate through COVID-19 times. If the vaccine does arrive by January, the strategy would have paid off. If not, the danger of the bubble bursting would become more real.

It may even be a double whopper if this is coupled with a negative Moneyval report penalising Malta for its bad reputation in governance, another casualty of the “good times”.

But if things go according to plan – and there is a good chance that they would – the economic model is expected to outlast COVID-19, with finance minister Edward Scicluna predicting a 5% growth rate next year. In short: the model has proved not just to be resilient in the short-term but also in the medium-term. But at what cost and what about the long-term?

Hooked on the model?

Apart from tangible environmental costs resulting from the construction boom, and the social impact of rising housing costs and an influx of precarious foreign workers, which erodes social cohesion, the other cost is that Malta is becoming hooked on a model which is self-perpetuating.

In the absence of attracting significant new industries as was the case with the pharmaceutical sector in the 1990s and the aircraft maintenance sector in the noughties, Malta risks over-dependence on growth spurts generated by sheer numbers of consumers, in a context where the Prime Minister himself is claming that the country is “full up” – a term he applies for asylum seekers, but never to the legal foreign workers who until 2019 were contributing to Malta’s economic success.

In the meantime, the search for new industries like medical cannabis and cryptocurrency has so far proven elusive, while promising investments like Smart City or the American University have either floundered or degenerated into real estate projects.

The ideological cost

The other cost of dependence on this model is ideological, fatally neutering Labour’s ability to redistribute wealth in fear of upsetting the engines which generate economic growth.

Deputy PM and health minister Chris Fearne is right in describing Labour’s ability to distribute wealth to the have-nots and protecting jobs as “leftist”. The contrast with the Gonzi administration’s response to the financial crisis is pertinent, with the only deliverable being a delayed pre-electoral tax cut for the upper-middle class, which was retained by Labour in its first three budgets.

But in his assessment Fearne ignores the other side of the equation: wealth creation. By demonising taxation as an instrument of wealth redistribution, Labour’s spending programme is mostly dependent on increased tax revenue from economic growth and on programmes like the sale of citizenship. In this way, no windfall in tax revenue was generated from the super-profits made by the tourism sector (amongst other industries) during the times of plenty.

Instead during COVID-19 the Labour government itself had to intervene to pump money to ensure that jobs are not shed in sectors like tourism itself.

Indeed, the entire COVID-19 strategy was derailed by premature demands by some business leaders to open up. What happens now that the long-term sustainability of key revenue generators like the IIP, has been placed in doubt as the European Commission initiates an infringement procedure? While Malta may buy time in resisting harmonisation on both citizenship and tax matters, the writing is on the wall.

When COVID-19 will eventually recede, other risks like climate disasters loom in the horizon. If anything, COVID-19 has shown how exposed Malta’s economic model is to the vagaries of the global market. In the end, when the money runs out or our debt becomes once again unsustainable, governments will have to rediscover how to administer fiscal medicine in difficult times, not just to finance the benefits to which we have grown used to in the times of plenty, or to improve public services; but also to encourage a change in behaviour which is vital to implement the vision of making Malta carbon-neutral by 2050.

The risk is that the electorate may have become allergic to new taxes in a way which erodes a social pact based on progressive taxation, built and consolidated by a socialist Labour party in the 1970s.