Why Labour risks a bailout
Last Sunday, Labour leader Joseph Muscat took me to task for expressing my fear that if Labour is elected and sticks to its promises, our country could be knocking on Europe’s door for a bailout in one or two years. Muscat was reported in The Times as having “rubbished” my claim.
The last time Muscat rubbished my claims, he was arguing that we should stay out of the European Union. And we all know how that turned out. But let’s stick to the matter at hand.
Muscat said that “Malta can never need a bailout because only countries that are indebted to other countries can require a bailout”. He pointed to last week’s report from Fitch rating agency as “his certificate” that Malta’s financial situation would remain stable irrespective of who won the next election.
Let me explain why I think Muscat is wrong.
In its report, which was shamelessly misrepresented by Labour, Fitch stated that “Malta will maintain a general government primary budget surplus in 2012-2014”. If anything, this is a certificate for the incumbent Government’s financial policies.
Fitch went on to state that “This implies that the incumbent Government will take the necessary action to ensure that the budget deficit remains below three per cent of GDP this year and that any new government emerging from the elections will set out a credible multi-year fiscal consolidation programme that incorporates the impact of ageing”.
Labour seized on the last part of this sentence as a ‘certificate’ that a Labour government would definitely set out a credible fiscal consolidation programme. But, in fact, Fitch is not saying that at all.
It is merely saying that its statement is based on the assumption that this would happen and not that it will certainly happen. So much so that in the original report – which Labour failed to read – Fitch uses the clearer term that it “expects” any new government – which may or may not be Labour – to set out a credible consolidation programme.
It added that “If there is material fiscal slippage this year or the post-election fiscal policy fails to deliver this, it could have negative rating implications”.
Labour did not quote that part of the report because it is hardly a resounding gurantee that a Labour government would be fiscally responsible. And this is precisely where my fears of a bailout under Labour come into play.
First of all, Labour’s key electoral promise is to reduce water and electricity bills. This will cost the country’s budget a bomb that we cannot afford. If we could afford it, we would have already done it. But we do not.
Just this year, we are already paying more than €30 million to subsidise utility bills, especially for vulnerable families. Now, if Labour keeps its promise to reduce bills in a meaningful manner, then we are looking at a bill – an annual bill, not a one-off – which is several times larger than this amount. Otherwise, it would be reducing your bill by just a few cents.
This alone would put our budget deficit outside the three per cent limit, not just for a year but for several. And it would turn the European Commission’s spotlight onto us. Investors will start getting worried and rating agencies may very well notch us down. This means lower investment and less jobs.
Secondly, Fitch insists that our consolidation programme must incorporate pension reform. And it warned that the main long-term threat to public finances is the unreformed pension system because pension expenditure is projected to increase dramatically.
Now, we all know that the Labour Party is not committed to a serious pension reform and has been opposing it for the past decade.
The moment Fitch realises that a new Labour government has no intention of addressing the pensions time-bomb it will not mince its words.
Thirdly, Labour has made a host of other costly electoral promises that would move our public deficit and public debt not just outside the Maastricht limits but well into bailout territory.
Among the more expensive promises are its commitment to refund VAT and car registration tax to about 18,000 regardless of the outcome of an impending court case. This bill would run into tens of millions of euros.
And then there are the promises that Muscat makes on the spur of the moment, keen as he is to promise everything under the sun. All costly promises that must be financed from somewhere.
Fourthly, Labour has been markedly flippant about the reform of public sector companies, from the shipyards to Air Malta. This means that it would continue using taxpayers’ money to subsidise them rather than get them to stand up on their own feet. Add that too to the public deficit and the public debt.
A quick back-of-the-envelope calculation is enough to show that delivering these promises would put the country in an unsustainable financial situation and even in the risk of default.
This is why I raised my concern that a Labour government would bring us closer to Greece than we may imagine. To dismiss my concern by stating that Malta will never need a bailout because its public debt is borrowed locally is superficial to the extreme. It is like saying that Labour can borrow money like there was no tomorrow and always be able to meet its obligations.
But we all know that spending sprees have their limits. Even the Labour leader should know that a country goes in default when it has unsustainable and irrecoverable debt, regardless of where the debt is coming from. If that happens, Labour may well be in government but you will have to pick up the bill.
I make just one disclaimer. My fears will not materialise if a newly-elected Labour government dumps its electoral promises.
But then Labour cannot have it both ways. It is either Muscat’s promises or our financial stability. Labour cannot do both.
Just think about it.
Dr Busuttil is a Nationalist member of the European Parliament.