Two lessons should have been learnt from the way the last financial crisis of 2008 was tackled. First, in a crisis, governments should act fast to support struggling businesses and preserve employment. Secondly, support measures should target a broad spectrum of beneficiaries. The broader the range of recipients targeted by the rescue measures, the better the chance of shortening the economic crisis.
The government’s mini-budget offers a package of €1.8 billion mainly in tax deferrals and loan guarantees. This financial package amounts to about 13 per cent of GDP. The UK, for instance, introduced a similar package that is worth 15 per cent of GDP.
Malta’s rescue package amounts to about €3,600 per person while the UK’s package represents an expenditure of €5,000 per person.
Prime Minister Abela described the measures as “strong and ambitious”. Many who have been affected by the partial shutdown of the economy may have very different reactions, as clearly indicated by the Chamber of Commerce. Some other EU countries have introduced more practical support for both employers and employees hit by the pandemic crisis.
The macroeconomic scenario of the Maltese economy, like that of many EU countries, is likely to be very different from what it was before the crisis.
The feedback from businesses is flowing fast onto the desks of government ministers. The tourism, entertainment, transport, retail and leisure industries are practically on shutdown. Job cuts are expected to be extraordinarily deep, and they are already happening. Liquidity must start to flow immediately in the bank accounts of companies in these sectors which commit themselves to retaining all staff, even if on a reduced hours basis.
Businesses that today are solvent could quickly go bankrupt if the wheels of bureaucracy take long to turn or ultimately do not deliver the kind of support that small businesses need to survive. Tax rebates and subsidised loans for liquidity and reimbursement of some employment costs are certainly the right tactics to limit the damage. Still, there will be cases where grants will be the only way to keep well-managed companies and their employees in business.
The support for individuals hit by the crisis is still not strong enough. Some countries are considering cash grants to the most vulnerable sector of the workforce. Utility bills, rents and daily subsistence expenses are top priorities for vulnerable groups. These need to be addressed if the number of victims of the crisis is not to escalate.
Government guaranteeing a higher percentage of workers’ wages would have made it easier for employers to retain more of their employees until the crisis is over. Denmark and Germany have introduced such schemes. They have been welcomed by those who believe that this crisis needs robust rather than half-baked solutions.
Finding ways to step up support for distressed individuals immediately is crucial to limiting the economic fallout resulting from this epidemic. The mini-budget does not focus on this sufficiently. A cluster of industries could face a meltdown if they and their workers are not supported more vigorously.
The economy faces significant risks, including spiralling job losses, businesses bankruptcies and depressed consumption. Unless more robust measures are introduced to address these risks, spending will never recover, and the economy will enter a vicious circle of low growth, high unemployment and reduced demand.