When we get out of the woods

Being lost in the dark woods of the present economic turmoil is not a pleasant experience for anyone. But facing the future when we get out of there is perhaps going to be even more traumatic. The fiscal stimulus measures being promoted by many political leaders in various countries are by no means universally accepted as the best solution by everyone.

Politicians in Ireland and Germany for instance have openly opposed the significant fiscal relaxation being promoted by other politicians, most notably Nicolas Sarkozy in France and Gordon Brown in Britain. German Finance Minister Peer Steinbruck in an interview with Newsweek accused Gordon Brown of practising "crass Keynesianism by throwing around billions" to try and resolve the present economic recession in Britain. Irish Finance Minister Brian Lenihan is not less opposed to increased public expenditure, even if he uses less dramatic language to convince the Irish.

This is hardly surprising. Prescribing a medicine for a rare disease is never going to be a risk-free exercise. The present economic crisis being faced by practically all the world economies is indeed a rare occurrence. There is hardly anyone around today who can honestly say that he, or she, has been through this before.

The two pronged approach being promoted by various governments to lower taxes and increase public borrowing to stimulate economic activity and avoid a slump is hardly the most elegant solution one would have chosen in less dramatic circumstances. It is like trying to drive a nail in a plank of wood with a brick. You may get the job done, but it will be a messy exercise.

Even if we do manage to escape a deep world recession as a result of the stimulus package being adopted by various countries, the price that comes with this relative success will be high. Long-term fiscal rectitude and the battle against structural deficits incurred by governments remains the gold standard for the management of public finances for any country. This is especially so for those countries that have a tradition of consistently overshooting their expenditure targets.

Even if we build more schools, improve our road system and the distribution network of our electricity and water supplies, it will arguably take decades to pay the price for these luxuries for countries who still have structural deficit problems. Structural deficit problems (caused by governments consistently spending more than they earn) can only be solved by reducing expenditure and / or increasing taxes.

Despite these sobering reflections, I still believe that in our case a more significant fiscal stimulus is needed to counter the threats of major impacts on our economy as a result of recessions being suffered by the countries with which we do business. However, I am more than conscious that fiscal tightening will not only become necessary, but also unavoidable once we get out of the woods of the present economic turmoil.

Like Ireland, we have a very open economy and as such we risk significant leakage of funds made available through a fiscal package based on tax cuts and increased public borrowing. Put in another way, in the present circumstances most of the extra money pumped in the economy will go into imports. That will not benefit our local business much, apart from importers.

But the present difficult prognosis of the current economic crisis convinces me that we risk more by not creating enough fiscal stimulants. The "do nothing" school of thought could only lead us to a slump from which we will find it difficult to recover. If we are lucky, we can hope that the rather mild stimulants being promoted by our government will be compensated for by the stronger stimulants being adopted by the countries with which we do business.

If the British or French tourists feel better off because of the fiscal incentives that their governments are creating, they may well decide not to give up their annual holiday in 2009 and hopefully chose Malta as their destination.

I just hope that governments, our own included, will learn one important lesson from this latest economic crisis - to adopt a tight fiscal policy when the economy is booming, and a more relaxed policy when economic slowdowns threaten jobs and growth.

After all, any relaxation of fiscal policy now comes with a price that will have to be paid for in the future when the going gets better.