A new economic formula, to address new realities | Clyde Caruana

While ruling out the living wage ‘for the foreseeable future’, Finance Minister Clyde Caruana remains confident that Malta’s economic strength, coupled with the resilience of its labour market, will see us through the pandemic in the end

Finance Minister Clyde Caruana
Finance Minister Clyde Caruana
Clyde Caruana on Reno Bugeja Jistaqsi

We have often heard political declarations, from the Prime Minister downwards, to the effect that ‘once the COVID-19 pandemic is over, the economy will bounce back to pre-2020 levels’. Don’t you think this is a case of ‘wishful thinking’?

When it comes to the economy, the most important thing is to always give people and businesses a positive outlook for the future. The worst thing you can possibly do is say that everything is going to collapse; and that the sun will not rise tomorrow.

Why?  Because the economy is built on trust. If people have faith, and the government continues to provide support, there is no reason to doubt that the economy will recover…

Naturally, this doesn’t mean we don’t face a serious challenge. I am perhaps the one government exponent who has a reputation for passing comments that journalists least expect…

In fact, you are said to have something of a reputation as a ‘Prophet of Doom’, within government circles...

Yes, it’s true. I can’t deny that I have that reputation, among my Cabinet colleagues. And it’s mainly because, as much as possible, I try to be factual, and loyal to the truth.

The truth, in this case, is that the economy took a hit; there is no doubt about that. And it wasn’t a small hit. If you look overseas, the tourism industry has been virtually wiped out…

More than ‘taking a hit’, the economy is currently on life support. And not everyone on life support, goes on to survive…

It is 100% true that the economy is being sustained by government support measures. But the fact is that the government’s healthy financial situation, inherited from the previous seven years, gives us elbow-room - more so than other countries – in which to manoeuvre.

This gives me the peace of mind that we have enough time to get our economy back on its feet…

How much room do you really have, though? The wage subsidies, for instance. How much longer can you realistically keep them going: one year?  Two years?

We certainly cannot keep the same rhythm up for two years, no. But the fact that there is now a vaccine… you might ask: am I expecting miracles from the vaccine? No: but if there is one advantage we have over other countries, it is that we are small. So we can reach our vaccination targets more quickly than others...

So you are optimistic that the economy can return to its former levels?

It will be a long road, certainly, and there will be setbacks and difficulties. As a ministry, however, we are preparing ourselves to face these challenges – and there is a lot of work to be done – but, at the end of the day, there is also light at the end of the tunnel.

Launching a consultation document this week, you questioned whether the time had come to introduce quotas – or some other controlling measure - for foreign nationals working in Malta. More than a question, however, it seems to indicate a rethink of government’s economic strategy. Isn’t this also an admission that you are expecting a downturn in economic growth?

No, not exactly. Everything that was done in the past seven years, was needed at the time to help the economy grow. And – to tie in with the previous question – this is what made it possible for us to sustain the economy in the present crisis.

But you have to keep making a stock-take of the situation, which is consistently developing. And yes; today, there are certain challenges, that didn’t exist before. It is my duty to not only acknowledge those challenges, but also to address them.

There are two ways to look at that: you could argue – as does the Opposition – that the previous strategy was merely to increase the population without a long-term plan… or else, that the economy has grown as much as it could, and therefore has to slow down…

No, no: neither one, nor the other. The recipe for tomorrow, is not the same as the recipe for yesterday. Before, there was need for the economy to grow to a certain size; but now, we need to find a formula – and it exists – to ensure that everyone enjoys the benefits of economic growth in the coming years. This recipe has to be different from the one we had over the last seven years…

All the same, you yourself have argued that this crisis is 50 times worse than the financial crisis of 2008. Then as now, it has left government with a gap in its finances, which it somehow has to fill. How do you intend to fill that hole?

Yes, there is a hole in our finances. And it’s not small. But under these circumstances, the worst mistake you can make – and, in my opinion, many European countries are making it, right now, out of desperation -  is to not safeguard the labour market, over and above everything else…

Jobs, you mean?

Jobs. Because if the labour market collapses, the government’s finances will simply never recover at all. As such, from my first days as Minister for Finance and Work, I have always given the same importance to employment, as to finance. To me, the labour market is not a secondary concern.  To this end, the emphasis I placed, in the consultation document, and the work I will be doing in the coming months, will be focused on the job market: because I am more than convinced that, if we get that right, the government’s finances will eventually get back on their feet.

How do quotas for foreign workers help, though? Third country workers also pay taxes and national insurance; surely, they contribute to the government’s coffers…

I never said that we were going to expel any foreign workers; or reduce their current number. What I said was – as I just repeated now – that our formula has to be different, in today’s circumstances. For example, we still have over a third (36%) of our local workforce with low skill levels, compared to their European counterparts. So if we are to ensure that the people’s quality of life improves, we can no longer simply rely on increasing In-Work benefits here and there.

We have to see to it that a substantial portion of the improvement comes from the labour market itself. Let’s be honest: over the years, various governments have declared that the country’s only resource is its workforce. But when you look at how much is actually invested in this only resource of ours… it doesn’t amount to much. You might point towards investment in education; and yes, there has been a lot. But it’s not enough. We don’t invest enough in up-skilling…

Up-skilling is certainly important. But isn’t it also true that we rely on foreign workers also (or especially) for unskilled work? That they are necessary to fill up positions that local workers do not want to occupy?

I wouldn’t say ‘necessary’, no…

So who will carry out this work? Robots?

Yes. [Pause]. Let’s not call them ‘robots’, however. But mechanization is a necessary component of the formula, if we are to maintain our current quality of life.

Coming back to the deficit: your government – like all its predecessors – seems allergic to the idea of increasing taxation. Given the circumstances, however: how long can you continue avoiding reality? Aren’t new taxes necessary, to close the financial gap?

If we act prudently [bil-ghaqal] – and allow me to emphasise that word: prudently – I see no reason for any new taxes. But if we throw caution to the wind… then sooner or later, yes, we will have to resort to desperate measures. But – and I’m saying it on the record – I see no need for any new taxes for now: so long as there is complete prudence.

I can understand that taxation is unpopular, with politicians and the people alike. But there are also areas where new taxes are justified: to safeguard the environment, for instance; or a tax on fattening products, to reduce obesity. What’s wrong with that?

But this type of taxation is not the kind that can realistically ‘fill a hole’ in the government’s finances. These are taxes aimed at bringing about changes to people’s lifestyles; as such, it is a totally different argument from the one I’ve been making… about sustainability, and the need to correct the deficit in the coming years.

Meanwhile, on a separate (but related) tack: there is also a plan to phase out the internal combustion engine, and replace it with electric vehicles. Government earns considerable revenue from duties on petrol and diesel: how do you propose to balance out the losses this revolution will bring about?

This is something that will happen, yes; but it’s not going to happen tomorrow. The process is envisaged to take a number of years.

And without a doubt, when the economy starts growing again: on the one hand, there will be new sources of government revenue… but at the same time, there may be losses of a few millions here and there, spread out over a span of years.

But I’m not worried about it. The real shock to the system would come if – for argument’s sake – we were to say that: ‘as of tomorrow, no more petrol or diesel’. That would be the decisive axe-blow.

But if the phasing-out period is extended over a long timeframe, the fiscal situation will have enough time to regulate itself. The reality is that cars are not going to disappear from our roads tomorrow.

They will be phased out over a number of decades. So even if we do to lose out on a few million a year, out of a budget that amounts to 4 billion… come on, it’s not such a big deal.

Meanwhile, in the same speech, you (very cautiously) acknowledged that there is a need for salaries to increase. Isn’t it time, then, to resuscitate the Labour Party’s 2013 proposal for a ‘living wage’: so that we can truly start addressing the issue of poverty in the country?

As you rightly said, I was very cautious when bringing it up. What I actually said was: while we recognize that salaries have to increase, we must also acknowledge that local industry is going through a turbulent period. We therefore have to ensure that there is an equitable, and fair, balance between supporting local industry, and safeguarding workers’ rights.

Without a doubt, then, we cannot go for any initiatives – even if they are considered ‘socially optimal’: in this case, the most ideal situation imaginable – that will also deliver fatal shocks which our industry, in its current predicament, cannot possibly sustain…

So what you’re saying is that we can forget the living wage?

For the foreseeable future: yes. For sure.  And whoever says otherwise  - or proposes any such initiative for the immediacy - clearly does not have a finger on the economy’s pulse right now.

How, then, do you intend to counter the problem of poverty: including the issue of a growing contingent of (mostly foreign) workers who are pushed into precarious employment?

If there is someone who, for the past seven years, has worked to address the poverty issue, through a number of different measures… that was me. Initiatives to create employment opportunities; to support workers in employment; or to wean people off social benefits, so that they rejoin the labour force… I think I can safely say that I made a small contribution to reduce poverty, insofar as possible.

But we also have to acknowledge today’s realities. If there is anyone out there who still thinks that we should add to local industry’s burdens, so that we can make a public show of solidarity with workers… do you know what would happen? That same month, those workers will have to register for the dole.

We have to be realistic here. Many of our industries are hanging by a thread; and we cannot be the ones to give them the kiss of death.

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