Budget 2012 | A case of political or economic brinkmanship?

The spectre of an early election | Recovering lost love? | Regressive policies | Labour's tax cut quandary | Labour's magic wand | Scicluna asks the right question

Budget 2012 gives GonziPN a new lease of political life through the rediscovery of a fiscal mantra which directly appeals to its traditional middle class constituency; but the success of which ultimately depends on economic growth in a very bleak international scenario.

Ironically, after lambasting Labour for its insularity in ignoring the harsh international climate, Gonzi finds himself projecting an economic growth rate, which could be over-optimistic in the same climate.

For ultimately the sustainability of last Monday's budget hinges on increased tax revenues generated by a 2.3% growth, a difficult and uncertain feat considering the bleak economic situation in other Euro zone countries. 

Moreover the government's projections do not depend entirely on its own abilities, as it will be extremely difficult for Malta to achieve that growth rate if Italy goes bankrupt.

The spectre of an early election

One possible scenario could be that Gonzi intends to call an election at the first indication that he will not be able to reach his fiscal targets by the next budget.

But such a move flies in the face of Gonzi's constant pandering to seriousness and responsibility. Seriousness demands that in the face of the storms around us, the government completes its full electoral cycle to face the judgement of the electorate in 2013 on the basis of its merits in weathering the storm. 

Otherwise Gonzi would be playing a dangerous game of using the budget as an electoral tool in the very dangerous times he is constantly and rightly evoking.

If this is the case, the government's best hope is that the mini injection in the pockets of high spending middle class families-who are the main beneficiaries of the tax cuts and other incentives-would in itself generate the feel good factor conducive to economic growth.

In fact the tax cuts cannot be simply dismissed as electioneering. By encouraging people to work and earn more, these measures may well have the opposite affect of austerity measures which tend to depress the economy.

But the risk is that by hinging its bet on uncertain growth, the government is leaping in the dark.

Recovering lost love?

What is sure is that the budget has gone a long way in renewing the love lost between the PN and its natural middle class constituency and this adds to the perception that last Monday's budget is paving the way for an election.

In real terms a couple earning €42,000 between them could see an extra €840 in their pockets couples with various other incentives if they send children to private schools or their elderly parents to a private home.

By dishing money in the pockets of middle class parents who send their children to private schools without losing sight of vulnerable but equally strategic categories like over 80-year-olds who will receive an annual €300 benefit, the PN could well reverse its electoral fortunes.

But even more effectively Gonzi has rediscovered a sense of direction, a fiscal narrative well tuned with middle class family values which treasure thrift, education and parenting. 

This class of people is also more likely to appreciate a tax cut rewarding their hard work than an indiscriminate cut in electricity bills which might well reward wasteful practices.

The very idea of a separate tax computation for parents gives substance to Gonzi's pro-family rhetoric. The fact that this benefit does not discriminate on the basis of marital status is in itself an inclusive message following the divisive divorce referendum.

Gonzi's direction is clear; the more you work, earn and invest in your children's education, the more you benefit.

Regressive policies

Surely there is a regressive element in all this, as the tax cuts and various incentives for private education tend to favour those who earn most.  The government has even increased the minimum rate of children allowance by €100 to €350 a year for each child-a move which benefits high income earners but leaves poorer families in the same position as before.

But this flies in the face of the realities faced by those in precarious employment, which is many times the result of the government's policy of dishing tenders to the lowest bidders who barely offer the minimum wage.  In many ways the budget exposed the PN's class bias.  But this targeted generosity has also posed an obstacle to Labour's constant attempts to lure the upper middle class.

Labour's tax cut quandary

Labour's response to the budget has exposed its weakness as a government in waiting.  Only on Saturday its finance spokesperson Karmenu Vella, probably aware that the government was toying with the idea of tax cuts, insisted that it would be irresponsible for the government to honour its pre electoral tax pledge to decrease the top rate of income tax from 35% to 25%.

It was an honest observation, which contrasted with Joseph Muscat's past declarations.  Interviewed by MaltaToday on 11 October 2009, Muscat did not refrain from proposing tax cuts a year after the collapse of the Lehman Brothers.

When I asked him what kind of budget he would present in current circumstances his reply was that he "would present a responsible budget which tackles the concerns of Maltese families: namely the cost of living" adding that he "would also give incentives to help families, even through tax cuts."

When asked whether it is responsible to cut taxes in the prevailing circumstances, he replied by  questioning the reasoning of the interviewer.

"You are looking at the problem in the same way as Minister Tonio Fenech. Previous ministers like John Dalli and George Bonello Dupius used to perceive taxes as a stimulus for the economy. When they reduced taxes, government revenue increased."

Ironically two years later the same Tonio Fenech has adopted the same logic proposed by Muscat two years ago and has literally pulled the rug from under Muscat's feet.  This has left Muscat cornered clutching at the only issue left in his arsenal, the electricity bills.

Labour's magic wand

Muscat ended up digging the trenches by invoking his mantra on the plan to decrease electricity bills. But the same criticism levelled by Karmenu Vella on the responsibility of tax cuts may well be used to shoot down any proposal to decrease electricity bills despite the increase in the price of oil. 

Muscat's insistence on electricity bills may well be inspired by polls which show inflation to be the top concern of Maltese, but it enables the government to turn the tables on him, by posing the question 'is it wiser to cut taxes for hardworking families or to dish out subsidies on energy bills?'  While Muscat's populism resonates well with a myopic segment of the electorate it could sound crass among more discerning voters.

Muscat's hesitance to submit his mysterious energy plan to public scrutiny adds fuel to the perception that Labour is unable to provide solutions or is afraid of questions on the viability and sustainability of its plans.  Clearly expecting civil society to objectively scrutinise these plans in a highly charged electoral campaign is not on.

In the absence of evidence to the contrary, by giving the impression that he possesses some kind magic wand, which flies in the face of global realities, Muscat is sounding like a quack.

Scicluna asks the right question

So far it was Labour MEP and economist Edward Scicluna who saved the day for the opposition by posing the fundamental question on how far does this budget goes in addressing public debt. 

As Scicluna observed it was the high level of public debt, and not the deficit, which proved to be Italy's undoing. In fact like up until last year Berlusconi, like Gonzi, was boasting of weathering the global crisis.

The only reference to public debt in the budget speech is that Malta's figures are low compared to that of other European countries.

Truly at 68.9% of GDP Malta's public debt is far lower than that of Italy (120%) and other embattled Eurozone countries like Belgium but it could spell trouble in the absence of measures to restrain it.  But such measures, which could include the mixture of taxes on wealth and spending cuts being implemented in other countries, would present a difficulty for both the government and the opposition. 

For the opposition is correct in identifying the debt problem, it is short on solutions, which could expose the fault-lines between old school socialists and closet neo-liberals, which can only co-exist in Labour as long as it remains in opposition.