Economic observers are now familiar with the often-different narratives provided by politicians and technocrats on how they see the developed economies evolving after the pandemic.
Politicians continue to see themselves as harbingers of imminent economic prosperity. Technocrats are warier and instil a hefty dose of scepticism in their predictions of how economies will evolve.
Finance Minister Clyde Caruana, an economist by profession who recently entered the political scene, gave a frank assessment in parliament of what the costs of supporting businesses and employment have been to taxpayers.
He rightly argued that now is not the time to worry too much about fiscal rectitude. The present global recession calls for massive fiscal support for the economy to continue to function.
But when defining how he sees the future evolving, Caruana wore his political hat and made some rather bold predictions. This is in contrast with what some respected international technocrats are saying.
For instance, Federal Reserve chairman Jerome Powell, in an ECB forum, commented: “The COVID-19 pandemic brought the economy to a screeching halt. While it has started its long road to recovery, the economy we knew is probably a thing of the past. We’re recovering but to a different economy.”
Is the Maltese economy immune to the pandemic’s long-term effects on its economic model?
Caruana argued that he is not too worried by the deficit, as what we are experiencing is a cyclical rather than a structural deficit. This may be a correct evaluation if one assumes that the Maltese economy will soon gallop back to substantial growth: tourists will once again reach the numbers achieved before the pandemic; construction projects will continue at the dizzying rates experienced during the recent boom; and our friendly tax regime will continue to remain unassailable despite growing pressure from major EU member states to promote a fairer tax harmonisation system for the Union.
However, if the new economic normal is going to be different from the old normal and characterised by lower growth rates, it is not unreasonable to argue that the deficit would metamorphose into a structural one.
Our free public health system, for instance, is becoming increasingly expensive to maintain with no inbuilt mechanism to fund it through some form of direct taxation.
Caruana’s hubris is evident in how he sees the economy evolving in the coming years. He gives the impression that once the economy starts growing again, presumably at the rate the country has experienced in the last few years, there will be no need for more taxation.
The minister would do well to heed Peter Costello’s advice, a technocrat who passed from being a politician to becoming the head of Australia’s sovereign wealth fund. He is quoted by the Financial Times as saying: “Anyone who thinks they know what the conditions of the economy will be in three years’ time is kidding themselves.”
Malta’s open economy is susceptible to external shocks. Add to this the local challenges, such as the uncertainty of how long Air Malta’s business model can be sustained.
Seen in this light, raising expectations of an economic nirvana can become counterproductive.
As in most developed countries, the Maltese economy is sailing in uncharted waters. So far, we have been successful in avoiding major economic failures. But the past, as is so emphatically stated in other financial contexts, is no guarantee of the future.
A healthy dose of pragmatism is needed if we are to navigate the rough seas that may be ahead of us.