A consumption-driven recovery plan

In a speech two weeks after the September 11 terrorist attacks, President George W. Bush urged Americans not to be cowed: “Get down to Disney World in Florida,” he declared, adding: “Take your families and enjoy life, the way we want it to be enjoyed.” Personal consumption expenditures increased sharply in October 2001, and the US recession that had begun in March of that year came to an abrupt end by November.

The government’s €900 million recovery plan announced last Monday seems to have been inspired by the same idea: encourage people to push up consumption and the Maltese economy will go back to what it was before COVID-19 cast its dark shadow all over world.

There is a psychological aspect in consumption. The devastating social effects of COVID-19 have led to widespread insecurity and depression; thousands have lost their jobs and the income of many other thousands has decreased substantially. People are just not in the mood to spend freely.

There are two flaws in the idea of pushing consumption in Malta. The first is that Malta depends on the consumption of foreigners – such as tourists – much more than larger countries. Indeed, in economic terms, it would be idiotic if the effect of local consumption in Malta is compared with that of big economies such as that of the USA.

With the staggering large amount of money that has been saved in Maltese banks during the pandemic, luring people to spend some of it seems to be on the right economic track.

The second is that a purely consumption-based drive – as the regeneration plan seems to be – can only work in the short term. One can, of course, argue that what Malta’s economy needs is a short-term kick-start for the economy to pick up so that it will all be back to what it was in a few months’ time.

This sort of policy is not even based on Keynesian principles that advocated long-term productive capital expenditure by the state but is simply a consumption campaign that will fizzle out to nothing after a short time. It ignores whether tweaks should be made because of social policy considerations, rather than because of purely economic reasons. To recall the old joke about statistics, if one person eats a whole chicken and the other goes hungry, the consumption would be statistically half a chicken per person.

Our government seems to be acting to ensure the statistical average can be reached while ignoring the plight of those who are going hungry. The PN’s criticism on this point is justified – not from a purely economic aspect but from a social justice one.

According to the Foodbank Lifeline Foundation, the number of families depending on food packs provided by the Foodbank increased from 130 families per week before the COVID-19 pandemic to about 300 families per week during Malta’s partial lockdown. At the same time Solidarity Meals – set up by Caritas and the Alfred Mizzi Foundation – were providing some 1,000 meals a day to people who could not afford to buy food. In the circumstances, dishing out restaurant vouchers of €100 to all and sundry sounds incredibly callous.

Moreover, as always happens, when vouchers are the chosen way to go about it, vouchers will be traded and the money recovered will be used for other purposes – often vice-driven.

Other aspects of the recovery plan appear bereft of any sense – either from an economic point of view or from a social point of view. One of them is the decision for the government to underwrite roll-over of bonds without giving any details of how and for how long – and under what conditions – it will be applied. This is a distortion of the way economic resources are allocated. It is a state intervention that goes against free market principles. It shifts the responsibility of foolish private investors onto the taxpayer. In the case of some dubious bonds, this amounts to a state bailout!

The reductions in taxation on property deals seem to be an attempt to induce a drop in property prices that is dependant on the reduction of taxation. This is again somewhat of a market distortion. I always believed that the property market is driven by demand and supply forces. Artificially increasing demand by reducing taxation to make property more affordable – albeit mainly for first-time buyers – is yet a case of the State further tweaking the free market. In this case the ultimate beneficiary is the construction industry.

Having said that, I think the plan will help many sectors make a quicker return to what they were before the pandemic. However, the recovery plan is no panacea for the ills of those economic sectors that depend on spending by consumers elsewhere – mostly tourism.

Malta’s dependence on tourism is nothing new, while our dependence on foreign workers’ consumption is much more recent. Does going back to what it was, mean Malta continuing to base its economic growth on cheap imported labour?

This recovery plan is no doubt short-term.

The aim should not be just to go to the situation before the pandemic, but to boost economic objectives based on value-added and an enhanced, skilled labour force.

The Captain Morgan debacle

The attempt to ‘persuade’ other EU states to take migrants saved in the Maltese search and rescue (SAR) area, by putting them on boats moored outside Maltese territorial waters, turned out to be Robert Abela’s greatest gaffe to date.

Joseph Muscat used to somehow persuade some other EU states to accept receiving a number of migrants every time Malta was faced with the duty of saving a boatload or two.

After the notorious end of Muscat’s premiership, Malta’s relations with the EU somewhat soured and Robert Abela had never had the opportunity to cultivate contacts within the EU.

Whoever advised Robert Abela to hire tourist boats to acommodate migrants without letting them land in Malta should have had a Plan B. They did not, and Abela ended up the worse for it.

Malta’s Permanent Representative in Brussels, Daniel Azzopardi, ended up taking ‘the blame’ for not convincing the other EU states to share the responsibility of the 425 migrants on the tourist boats... and he has now been moved to the Maltese embassy in Spain.

Actually, Malta’s tactics were to blame, and it does not seem to me that these tactics and the idea of migrants being kept ‘on hold’ in mid-sea originated from Daniel Azzopardi.

Azzopardi’s replacement, Marlene Bonnici, is an old hand at the game. Even so, her job is no easy one, considering that Hungary, Poland, Slovakia, the Czech Republic, Estonia, Latvia and Slovenia, have all declared that they would not accept any compulsory relocation of migrants.