The coronavirus pandemic is triggering an unprecedented combined negative supply and demand economic shock. The interplay of these shocks will definitely have a deep and significant impact on production, consumption, employment and incomes. The risk is that the expected downturn will turn into a self-perpetuating and ever-deepening recession.
We have already started seeing calls from the private sector for governments to intervene and to think big in their economic reactions. A number of governments in the EU, including Malta’s, have launched so-called mini budgets with headline figures running into the billions.
Malta’s fiscal stimulus package amounts to €1.8 billion, or around 12 per cent of our GDP. However, upon closer inspection, the bulk of most stimulus packages, including Malta’s is anchored around guarantees, credit lines and tax deferments.
Such packages reveal a serious misunderstanding of the nature of the crisis. This thinking shows that European policymakers did not learn from the euro crisis and, to Winston Churchill’s dismay, have let a crisis go to waste. In fact, it is the same misunderstanding that powered the euro crisis a decade ago.
Now, as then, companies and households are facing insolvency, not illiquidity. The only way out is for governments to think big and to launch fiscal expansion programmes.
Malta’s package, as announced by the prime minister, includes a liquidity injection through a deferral of tax payments and bank guarantees amounting to €1.6 billion, or 84 per cent of the total package. Providing liquidity can help businesses and laid off workers weather the storm, but this policy is insufficient given the current pandemic.
Loans do not compensate businesses and workers for their losses; loans just allow them to distribute costs over a longer time horizon.
Keeping businesses alive through this crisis and making sure workers continue to receive their wages is essential
Keeping businesses alive through this crisis and making sure workers continue to receive their wages is essential, especially for those businesses and workers that have to remain idle due to social distancing.
What is therefore needed is to think outside of the box and to devise a new temporary and targeted form of social insurance. The reasons that such a policy is needed and would work in the current circumstances are twofold. First, the driver of the shock is not of an economic or systematic nature.
It is a health crisis which is temporary in nature. Second, different industries are affected differently especially those directly affected by social distancing.
Governments need to therefore devise a scheme that directly targets and works through affected businesses. One such way of doing this is for the government to act as a buyer of last resort, replacing the evaporating demand so that businesses can keep paying its employees as usual.
This should not happen as a free-for-all cash programme but on the basis of conditionality.
Such conditions need to be structured to not only guarantee the retention of staff but more importantly to support the transformation of the businesses in question.
Such programmes, and also through the availability of soft loans, need to be tied to investment upgrades, investment in digital platforms and e-commerce capabilities and green technologies.
More importantly, especially for workers with idle time, such interventions need to be conditional on investment in human resources through training programmes to help them acquire new skills.
Such a programme does not come cheap. However, it is precisely for periods like these that government intervention is needed.
The economic cost of limited intervention will be much higher in the long run.
Thankfully, we are in a strong position given that public finances are on a strong footing.
Over the past few years, Malta has consistently registered a fiscal surplus and a declining public debt. Growth was strong, unemployment at its lowest and confidence was high. It is therefore essential for the government to intervene and to intervene in a big way. It is only this way that the economy can be cushioned effectively throughout this trying time.
This is the time for economic leadership. It would be a mistake to start equating deficits or an increase in debt as a political failure. The government has access to low-interest funds and the excess liquidity in the market can also be tapped by the issuance of specific bonds.
In a period of low interest rates, it is only fiscal policy that can cushion the economic impact. We need to understand that these are exceptional circumstances which require targeted, temporary and timely responses.
A new form of social insurance based on government acting through a buyer-of-last-resort programme would alleviate the hardship of workers and businesses. It would maintain the cash flow for families and businesses, so that the secondary impacts on demand will be limited and the hardship minimised. Time is of the essence. If we truly want to save Malta’s economic legacy, we need to act fast and big.
JP Fabri is economist and visiting assistant lecturer at University of Malta