Much of the attention given to Labour’s alternative Budget continues to focus on its affordability in accounting terms. That is, on whether Labour’s proposals, the various tax cuts and subsidies, would pay for themselves or whether they would fatally drive up costs for businesses or the government. Less attention is being given to the insistence by the Labour leader, Joseph Muscat, that the proposals are based on an alternative economic vision.
Affordability is a key issue but there is a difference between discussing it in accounting or economic terms. Accounting balances expected income against spending commitments. Its logic resembles that of household budgeting. But economic logic often runs counter to common-sense intuitions. It is concerned not just with living within one’s means but also with changing behaviour – through incentives and disincentives – to increase one’s prosperity. Crudely, accountants deal with a stable universe, economists with a messier one that is expanding or shrinking.
Costing Labour’s proposals in accounting terms – as the TV programme Bondiplus has done – is graphic. Whether or not you agree with the accuracy of the figures, it focuses the mind. However, no accounting terms can ever represent Labour’s proposals with 100 per cent faithfulness. Dr Muscat has repeatedly said he will fund his proposals by stimulating economic growth. Of course, the impact of that cannot show up in accounting terms until his policies have taken effect.
Dr Muscat has so far said he will only reveal the detail of such policies when a general election is called. But, over the past two years, apart from saying he found the idea of a living wage interesting, he has enunciated four tenets of an economic creed concerning taxation and the funding of social entitlements.
These tenets are: First, tax cuts always stimulate the economy. Second, taxation ought to shift from income tax to environmental taxation and consumption. Third, a significant proportion of his spending commitments on social entitlements would be offset by savings on cutting waste and losses to the government and private revenues that stem from weak bargaining and “corruption”. Fourth, social security can be funded by economic growth.
The problem is, even the little Dr Muscat has said about them makes it difficult to understand just how these tenets would work, in practical economic terms.
First, tax cuts: I think I’ve really heard Dr Muscat say that economists agree that tax cuts always stimulate the economy and rake in more revenues for governments. Actually, they don’t. The Nobel Laureate Paul Krugman habitually uses his New York Times column to berate US politicians’ mantra about tax cuts, particularly in this fiscal crisis but not only now.
The economic record bears him out. It is one thing to cut income tax from 65 per cent to 35 per cent, as an earlier Maltese government did some 20 years ago. That is likely to work. But always? It is another thing to cut the top rate down from 35 per cent, as Lawrence Gonzi promised. What saves that promise from being reckless, as distinct from optimistic, is the flexibility concerning the timing of its implementation. That ideological champion of tax cuts, Ronald Reagan, failed to increase revenues (and had, indeed, to raise taxes after his 1984 re-election).
Second, the shift from income tax to environmental and consumption taxes: Much of continental Europe has engineered this shift; less so the UK, and even less so the US. The tax structure of the latter two countries means that most of their government revenues come from income, capital and corporate profits. Believe it or not, what this means is that the UK and, especially, the US have a more progressive tax structure than either Sweden or France. The share of total household taxes paid by the richest 10 per cent of the population is 48 per cent for the US, 28 per cent for France and 27 per cent for Sweden, according to OECD figures.
Both tax structures involve trade-offs. The continental model makes revenues more resilient in time of economic crisis, since they are less dependent on corporate profits. But it is more regressive. That is, since the less well-off spend a greater proportion of their income on consumption and energy bills, they will pay a greater proportion of taxes as well.
A shift to the continental structure appears to be happening under this government. The removal of subsidies for utility bills is not strictly speaking a tax. But it did have a regressive effect. It is one thing for Labour to criticise this effect. But how can the criticism be squared with the declared intention to engineer a similar shift in tax structure?
Third, cutting waste and losses from weak bargaining and “corruption Waste concerns expenditure that recurs, year in, year out. Weak bargaining and corruption concern one-off losses. On Dr Muscat’s own presentation, the moment he takes over Castille, such losses would stop. Any savings he makes by bargaining well and eliminating corruption would be short-term. They cannot fund long-term commitments.
Cutting waste would, on the other hand, release government funds for other purposes. But other governments are making such savings, to a significant extent, by cutting government jobs. Is this what Dr Muscat has in mind or why is Malta different?
Fourth, social benefits can be fuelled by economic growth. Even unemployment benefits? Those claims tend to grow precisely when the economy is contracting. Can the Maltese economy, so dependent on other economies’ health, be immune to contraction during international crises? Where will the money come from then? Not from the good years; that money would have already funded income-tax cuts.
Presumably, Labour has answers to all these questions. They need to be given if Labour wants to insist on the distinctiveness of its economic vision. Otherwise, it would be leaving the field wide open to its adversaries.
ranierfsadni@europe.com