In an interview given to the BBC last Sunday, Mervyn King, former governor of the Bank of England, delivered a very clear message on the UK economy, which must have made Sunday lunch not very pleasant for the British. Although he was speaking about the UK economy, his words can apply to most other countries.
The interview was reported in the British press as the UK was preparing itself for the appointment of a new prime minister, which eventually happened this week. He told the British public to expect to face years of financial hardship, which could be worse than what was experienced some years ago. He also said that households would face both higher taxes and higher mortgages.
King went further and said that average income earners would be expected to bear most of the brunt for the UK government to have enough resources to increase spending to support its social programme. He argued that taxing the wealthier people would not bring in enough revenue to meet this objective. The underlying message was clear: be prepared, look into the future.
Malta’s budget for 2023 has just been presented. It includes a sizeable amount of social expenditure aimed at helping lower income earners in the face of the current high rate of inflation. One may argue that it does not go far enough, and the budget could have been bolder in its “socialist” perspective. It could have given more resources to lower income earners while it could have taxed higher income earners.
However, this argument goes into the realm of politics which is not my objective. From an economic viewpoint, it is evident that the budget sought an element of levelling up to stop persons from falling into the poverty trap because of the current economic circumstances.
Yet, there is no escaping from the fact that the world’s leading economies will go through a very bad patch and this will once again test the resilience of our economy. So far, over the last three decades and more, we have managed to weather these international economic storms.
We need to think about the possibility that times may not be so good in future
We should also be careful not to talk ourselves into a recession, especially since the eurozone will be hit by a recession in any case. We just have to make sure that we are able to defend ourselves well, as we certainly cannot insulate ourselves from it.
At some point or other, interest rates will rise. We have already seen this happening in new bond issues. This will impact both businesses and families who are exposed to loans. For most families, it will mean higher loan repayments on their property. There will be no escaping this unless banks absorb the increase in the cost of money.
The increase in inflation will be mitigated by the so-called cost-of-living adjustment mechanism. At present, the government is also subsidising fuel and energy. There will come a time when that would not be possible anymore because of limited resources. We also know that the government is reviewing our taxation system, and this may increase the tax burden in certain areas, while reducing it in others.
When times are good, one tends not to look much beyond the present, assuming that the good times will remain. And may the good times remain. However, we need to think about the possibility that times may not be so good in future. We also need to think of the debt being bequeathed to future generations. On both these issues we need to look at the risks and seek to manage them.
We probably need to increase our savings rate to enable us to face the challenges of the “rainy day”. We need to cut wasteful expenditure across the board – personal, business and government. We need to develop those areas that will provide the future growth spurt of the economy. We need to make sure that our current level of social cohesion is sustainable in the future.
It is not the role of the budget to tackle such issues as, by definition, the budget just looks at the coming year. Nevertheless, we need to look beyond the immediate future. That is everyone’s job and not just the government’s.