Households and businesses may still be relatively sheltered from the worst effects of rising inflation, thanks to the government’s shock absorbers put in place over the last few months. While, in March, inflation in the eurozone hit a new record of 7.5 per cent, Malta’s rate is still around 4.2 per cent.
These divergent rates are mainly due to other member states not absorbing the rise of energy prices, as Malta’s government pledged to do. But for how long can the government shelter the economy from the inflation dragon’s raging fire?
Finance Minister Clyde Caruana has no illusions about the long battle ahead to avoid the onset of stagflation – high inflation and stagnant economic growth. He told the MCESD: “The reality around us is what it is. We can anticipate how we expect the (inflation) situation to develop because it is already happening overseas.”
Caruana was referring to the spiral of inflation hitting food prices, electricity, fuel and practically all other essential items that consumers could buy for a long time at relatively stable prices.
The finance minister argues that “we cannot be expected to control everything”. While few people now believe that the government should refrain from meddling in the dynamics of the economy, there are limitations as to what any government can do to protect jobs, living standards and consumer expectations.
The western economies are facing an economic crisis that is not unlike the 1970s when two oil shocks rattled the prospects of economic growth. The government’s inflation management strategy is still not clear.
This year’s election campaign did not do much to keep people informed about how the country would have to deal with what looks like a long marathon to control inflation.
The monetary policy tool is arguably not as effective as it used to be in the past, even if many economists argue that the European Central Bank should not delay interest rate rises any further. So the government needs to sharpen its fiscal tools to ensure that taxpayer money is used judiciously to support households and businesses, without imposing onerous burdens on future generations.
It may still not be politically expedient to speak about raising taxes selectively to defray some of the costs to support the economy. Of course, it is not the time to increase personal taxation. The opposite may be necessary. But the time may not be too far away when the government will have to consider taxing wealth while freezing tax on work.
Daunting challenges lie ahead. Caruana said that, despite an explosion in energy prices, the European Commission has remained adamant about maintaining emission reduction targets. Fiscal rules binding the Eurozone states will be revised but they will not be repealed.
Trade unions, employers and households will all play a part in how the nation navigates the inflation minefield in the coming years. Unionised labour and the business lobbies need to moderate their demands for state action to mitigate the effects of inflation.
The government has a grave responsibility to prioritise those living on the fringes of society – the working poor, single parents and pensioners with limited assets and inadequate income – as well as targeting any aid to business towards those sectors most vulnerable to rising costs.
Caruana did well to prepare the country for some tough, straight talk on the risks we face in dealing with this unprecedented economic turmoil.
He now needs to take the discussion to the next level by announcing an action plan that will be fair to present and future generations of taxpayers.