The economic crisis staring us in the face in the wake of COVID-19 is unprecedented. Many governments are opting to throw money at the problem, but money will not kill the virus and stop the pandemic, and so-called ‘stimulus’ packages will have zero effect when people are locked indoors and commerce is halted.
In the spirt of national interest and having experienced the 2008-2012 economic and sovereign debt crisis, I would like to share my thoughts on how the government should address this crisis.
Unfortunately, the package of measures announced by the government falls short of what is needed. The seemingly large €1.8 billion economic package is in effect very small as government is only really putting in €180 million in actual terms for the economic sectors.
Postponing €700 million in tax due for three months only costs the government the refinancing cost, which can be around one per cent per annum, thus costing the government €7 million in one year.
The cost of €900 million in loan guarantees is zero.
The government may make some money through this initiative as a fee is usually charged to the borrower for such a guarantee, which I hope will be waivered.
Also, it appears that the government guarantee will only cover 20 per cent of the loan. It is not clear to me how helpful this will be to companies that are already very stretched.
The cash injection to save jobs is in fact €175 million through support schemes, which is a start, however, in my opinion, this will drain employers’ reserves very quickly and result in redundancies, especially since it isn’t clear how long this ‘period’ will extend.
On March 17, I sent several proposals to Prime Minister Robert Abela in the hope of providing a different dimension and potential solutions to what was being discussed.
With everyone encouraged to stay inside and only shops related to food and medicine allowed to open, we are in a practical lockdown. Considering the evolution of the pandemic in Malta, a total lockdown at some point is inevitable. Effectively, the country is paralysed.
To plan properly, it is essential that the health authorities provide a realistic assessment of the situation.
If we manage the situation well, we are small enough to make this a controlled, short economic bleep. Sharing the burden among everyone would reduce the impact and allow for a relatively faster economic restart after the lockdown period. Effectively, what I propose is an economic “time-out” manoeuvre.
The government determines the economic support period with the health authorities. This has already started and will extend to whenever the government announces that life can resume normally. For the sake of argument, let us take this to be two to three months, possibly extending to six months or more.
My proposal is that the government implements an “economic time-out” during this period, controlled through special legislation and adequate support measures.
This entails that the country takes stock of the economy on the day it applies the manoeuvre and preserves that position to enable a restart from that same position when the lockdown period is over, with the least impact and disruption.
This is akin to when time and score are frozen for a timeout or half time during a football match and the game is resumed with that same time and score when the referee whistles the resumption of the game.
Therefore, during the “time out” period, the government would give a time out to all payables and receivables, interest accumulation, taxes and so on and restart those obligations when economic activity can resume.
Meanwhile, support measures are introduced to protect and sustain employees and their families, irrespective of their nationality.
How it works
The government first issues a special law with a start and end date in line with the heath authorities’ recommendation of when normality is expected, which can be extended if needs be. The following measures apply during this “time out” period:
- All loan repayments would be suspended and all interest accruing from such loans would be waived during this period. Interest is to be forgone, not merely postponed as would happen in a moratorium. The loan repayment period is extended by as many months as the “time out” period.
The Central Bank would suspend the application of negative interest on the deposits help by banks. Banks are not allowed to make call-ins or proceed with judicial or other recoveries, and the banking regulator will not classify these loans as non-performing loans requiring banks to increase their capital. When the period expires, banks and creditors would resume as from day one of the “time out” period. It is socially just that banks carry their share of the burden and are factually supportive during this crisis.
- All trading on the Malta Stock Exchange would be suspended. Prices and any bond repayments are suspended during this period and interest is waived. The maturity date of the bond would be extended by as many months as the “time out” period. If a company is due to settle a bond during the period, the date of settlement is also extended proportionately.
- All rents are waived during the “time-out” period and contracts are automatically extended proportionately. Support measures would be put in place for those for whom rents are their sole source of income, which I will propose hereunder.
Property owners will be prohibited from evicting tenants and the period of the suspension should end one month after the forced lockdown closure period to allow workers to receive their first pay.
- All contracts, including promises of sale, are also suspended for the period covered by the “time out” bill and restarted at the end of this period. This means that promise of sale dates are postponed by as many months and other contractual commitments are frozen. If we want our economy to restart from where it left off, then third country nationals must also be part of the solution
While the political temptation is to focus on Maltese/EU workers, there are serious repercussions if third country nationals are not included. If we want our economy to restart from where it left off, then third country nationals must also be part of the solution.
At the level of business, the notion propagated by the Minister for the Economy that “businesses have had it good in the past years and now it is time for them to pay out” may be a nice populist sound bite, but is actually out of touch with the daily challenges of running one’s own business.
Not all businesses made the money the construction sector, banks, or the online gaming companies did. Small businesses, which comprise 80 per cent of our economy, “jaqilgħuha u jiekluha” (live hand to mouth). It is wrong for the government to assume that these businesses have such deep pockets.
I agree that employers should uphold a social responsibility and not lay off workers without seeking to offer some support, but this support can lead to bankruptcy or increased indebtedness, which may lead to a point of no return with jobs lost anyway.
What I found in the 2008 crisis is that if small businesses are given support to retain their workers, they would prefer not to declare redundancies, even if they must partially carry the burden. Maltese businesses have a sense of loyalty towards their employees and would not like to lose people they painstakingly trained and trusted.
The measures announced so far by the government need to be improved if we are to sustain employment during this “time out” phase.
- As a start, the government should (as is happening in other countries) not postpone but ‘credit’ national insurance contributions during the period. These would be recorded in pension records as paid for pension purposes, but businesses will not be required to collect NI from their employees and pay their share of the contribution to State coffers. This would be akin to when a parent goes on parental leave, for example.
- Employed parents who due to the lockdown are not in productive work and are sent home to take care of their children are compensated at a higher level then workers with no dependents.
Working parents will earn 75 per cent of their pay during the period, which, however, will not be worked in terms of the minimum wage (the €800 per month proposed in the government’s present package) but in terms of the average wage of around €20,000 per annum (i.e. €1,700 per month). The government will pay 50 per cent of this wage while the employer will pay 25 per cent of it tax free (amounting to approximately €1,275 per month tax free).
Public sector employees who are also not actively working should fall within this scheme, while public sector health workers in contact with COVID-19 cases should be receiving a special allowance of, say, 25 per cent over their pay for this period.
- All other employees who cannot be actively working and who have no dependents will receive 50 per cent of their salary, with 25 per cent paid by the employer and 25 per cent by the government, also worked in terms of the average rather than the minimum wage.
Given the other measures in place, their net income position will not be significantly impacted, thus receiving around €850 tax free and no rents or house loans to pay.
- Self-occupied individuals (self-employed), including landlords who are not receiving any rents and other businesses that have been closed, also need to be assisted in maintaining their families.
The same principles should apply whether the individual has dependents or not, thus being compensated 75 per cent of the average wage if the individual has minor dependents, and 50 per cent of the average wage if the individual has no dependents.
The government may want to also consider increasing the support granted to micro-business that employ less than three people, who in effect may not even be able to support the 25 per cent payable by them to their employees and also sustain their own families. These allowances paid during this special period should also be tax free.
- With regards to production facilities (factories and the supporting SMEs), I believe schemes similar to the ones introduced during the 2009 crisis should kick in. These facilities would drop to a four- or three-day week with the government funding the other forgone day or two, also using the conversion of tax credits into cash grants to sustain investment during this period. Such measures may also need to be extended to other sectors.
10. The government could consider alleviating the burden of the “time out” period by postponing water and electricity bills with no interest accruing during this time.
There is obviously a public expenditure in these proposals that will exceed the €175 million the government has possibly budgeted for. I have tried to distribute this burden equally, however, the cost of an economic collapse will be much larger in terms of hardship than the costs of the interim measures the government needs to undertake.
This is a critical hour. I hope my thoughts are taken in the spirit they are intended – as a response free from political partisanship to get out of this crisis together.
Failure will hurt us all.
Tonio Fenech is the former Minister for Finance, the Economy and Investment
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