A global crisis, a national problem

Switching on the news or reading The Economist is sufficient to exorcise the myopia of those who think that the hike in fuel and food prices is simply the government’s fault. The crisis is global. From communist Havana to capitalist London, governments have nothing to offer but austerity, cuts and tears. There is no escape from the world economy.

The Labour Party’s leadership is walking on a tightrope between exploiting popular anger against the hike in prices- at the risk of appearing myopic to the discerning voter-and proposing rational solutions. It has to be made clear that there is no turning back to zombie solutions like subsidies for energy use or fuel. For any attempt to control price hikes by reintroducing subsidies would translate in either higher taxes or spiraling deficits.

So far Muscat has intelligently steered away from this course by focusing on the lack of transparency on the part of the regulator (the opaque MRA in this case) and lambasting government for the lack of a real energy policy. I agree with him on this point but that would not make Malta immune from international prices.

And investment in alternative energy makes long-term sense but would not bring an immediate decrease in prices. All studies so far suggest that renewable energy is still not cheaper to produce than oil.

Consumers should also know how much they are paying for oil prices and how much they are paying for inefficiencies. Such scrutiny will only be possible when regulatory authorities like the MRA are made completely autonomous of Ministers and governments and turned in to independent quangos. But this would require a relinquishing of control which is alien to Maltese political culture.

On the other side of the fence Gonzi’s government which has rightly preached restraint and so far refrained from damaging the economy by slashing taxes has shot itself in the foot by raising the salaries of Ministers and MPs at the very moment when dark clouds were returning to the horizon following a very short lull of sunshine.

It has undermined its own moral legitimacy to lead the country through a global crisis of unforeseen proportions. What’s wrong in my opinion is not the principle that Ministers should be more highly paid than their employees but the secrecy and the timing.

From now on, whenever he is asked to do something and he replies that there is no money, he will be reminded that there was enough money for the Ministers’ salaries. I still can’t grasp how the Prime Minister failed to understand the popular mood by insisting on the increase in MP salaries at the worse possible time when the government’s space of maneuver is limited by a crisis.

For it is becoming increasingly unlikely for the government to decrease income tax for the relatively well off unless it wants to endanger the country’s finances and thus risk a Greek tragedy. As economist Karmenu Farrugia recently warned “the need for fiscal consolidation demands that both political parties desist from even mentioning the possibility of lowering the standard rate of income tax (35%) for the foreseeable future, but especially before the next parliamentary elections expected in 2013.”  

Therefore Gonzi cannot afford to ditch restraint to buy middle class votes on the eve of the election. But even the opposition should heed this warning by not indulging in populist promises. Surely there can be a long-term shift in taxes. But eco taxation cannot replace income tax as it is by its very nature revenue neutral-an important instrument to change consumption patterns.

At the moment any government with a social conscience is expected to divert some resources to those who are worse off. It is not expected to dish out compensation to all and sundry irrespective of their income. This could come either through new sources of revenue like taxes on speculation or by means testing some benefits without impoverishing the lower middle class.

One way of doing this is providing more substantial subsidies for solar water heaters for anyone earning less than a certain income. But money cannot be invented. It has to come from somewhere. 

And while the government deserves credit for keeping unemployment low, it can no longer hide the fact that it finds itself dishing tenders to employers who barely pay the minimum wage, thus increasing the social pain. The government itself should be encouraging better working conditions rather than a race to the bottom.

On the other hand the government cannot afford to derail itself from the long-term goal of shifting expenditure from subsidizing consumption of resources to investment in education, child care and the environment. For inequality becomes a grave injustice when it is passed from one generation to the next.  Each cent spent in subsidising fuel for the well off  is a cent stolen from the education budget.

The only way to avoid that is through long-term investment in social mobility. One such investment would be extending school hours. And it would be a shame if the sectoral interests of some unions are allowed to prevail over the interests of female workers in general. We cannot afford to lose an entire generation because of the economic crisis by abandoning investment in the future to meet present needs. 

Gonzi should be reminded that one can still be progressive at a time of crisis. But Muscat should remember that there is nothing progressive in denying the deficit, the sustainability of our pension system and global realities.