Guest post: Why it would be a bad idea to reduce income tax now
Joseph Muscat thinks there should be less tax on income from sales of fireworks chemicals, so that he and Michelle can take more cruises - that is, if Norman Hamilton charges them at all.
NB: ‘Guest post’ means that I didn’t write this one either.
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Does it really make sense to reduce income tax now? This is the question journalists should ask politicians who want the government to throw caution to the winds and cut income tax.
In 2008 we had an oil crisis that spelt hard times ahead. But no one could then foresee the exact course of the banking crisis of the autumn of that year, the worst recession since 1929, the ensuing high unemployment, and now the debt crisis that’s hitting most countries with which we like to compare ourselves.
One of the effects of these crises is a more pronounced effort by the European Union to prevent another Greek-style tragedy hitting Spain, Ireland, Portugal, Italy or even France. That kind of thing would unravel the euro, and with it perhaps the European Union.
Making sure that its members keep to the 3% of GDP limit in their budget deficits will be on Europe’s agenda for years to come. Just now, EU leaders, including our prime minister, are discussing harsher sanctions for those countries which break the rules. We should be very much in favour.
Low budget deficits are in every country’s interest. Interest payments on their debt are eating away at many countries’ ability to face huge future outlays on pensions and healthcare because of aging populations. They are also hampered in making the investments they need to compete in world markets.
Malta has been hit only slightly by these successive international crises. We are one of just a few European countries to have a budget deficit close to or within the rules next year.
This is especially in our interest because we run the risk of being lumped with our EU Mediterranean neighbours by financial markets and by investors who cannot afford to invest in crisis-hit countries.
This is what our ever-so-shallow Opposition leader has failed to grasp: that there is absolutely no trade-off between job-creation and sound public finances. Malta has very low unemployment (less than 5%) because of, not despite, our sound public finances.
The investments being announced daily are a direct result of the trust international investors instinctively have in countries where responsible governments keep their house in order.
Hollow politicians like Joseph Muscat order the government to ‘put money in people’s pockets’. But what has ensured Malta’s success was that the government very clinically saved thousands of jobs in export-oriented firms with highly targeted incentives.
What Joseph Muscat would have done with the subsidies so beloved of Labour would have, at best, had absolutely no effect and, at worst, increased our imports, which is the worst thing you can have in a recession.
Joseph Muscat has not yet understood that we are an open economy where macro measures rarely work because we have too many leakages. Any extra cash a Maltese person might have, for example, is as likely to be spent outside Malta as within the domestic economy. What works are the micro, clinical and targeted measures that the government has so successfully taken.
This is why, when you talk to foreign investors privately, they show horror at the very idea that someone as superficial as Joseph Muscat might be leading this country in a few years’ time.
Reducing income tax now – as Joseph Muscat says, to dangle a carrot in front of his ‘middle class’ targets – would be tantamount to taking leave of our senses and throwing away what we have achieved in these two years.
An income tax reduction would definitely lower government revenue in the short term, even though there is sound economic research that shows government revenue then increasing in the longer term.
All other things being equal, an income tax cut would have no effect on economic growth, because people tend to save this extra disposal income in times of uncertainty, and not spend it.
Worse, cutting income tax now would take us back over the 3% deficit limit. And that would make Malta unattractive for investment, lumping us with the typical Mediterranean profligacy of our neighbours. We should be an exception – a beacon, even – in Mediterranean Europe, not the rule.
As things are panning out, we should have a budget deficit going down to around 1% of GDP by 2011-2012. If there are no further crises (admittedly, a big if), the government would then have enough leeway to reduce income tax without breaching the 3% rule – that is, without threatening the financial stability underpinning further investment.
Of course, when the government eventually cuts income tax, Joseph Muscat won’t be clapping. Instead, he’ll be attacking the government for giving ‘a tax break to the rich’.
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Can you let us know who is writing the guest posts? Helps to know who the author is.
If this article was headlined by the Times or Maltastar, a question mark would be put at the end.
We’re interested in the songs not who the singers are. If one reads a good argument, it remains a good argument no matter who wrote it.
Good article. Malta’s current economic grwoth is quite vulnerable, in the sense that the trend can quickly reverse with the slightest misguided policies and future expectations. FDI is a sensitive target and above all, cautious.
This past week, I was appalled and disgusted at the way the budget was reported by the Times. It seems that in order to compete with MaltaToday it has thrown away its standards, and has adopted the MaltaToday style of disguising opinion pieces as reportage. There are plenty of examples.
The bias and spin against the government is quite transparent, and it seems that they are not embarrassed to show it, which means that the ‘reporters’ have the blessing of their superiors.
I have one technical question. Does the reporter chose the title of the report himself/herself, or is the editor responsible for that?
Basically this analysis underlines the difference between PL and PN.
The former delivers to the people what they desire and the latter what they really need.
To my mind the distinction is crystal clear.
Good article with sound arguments. With one serious flaw, though. It was LAWRENCE GONZI, and NOT Joseph Muscat, who promised hefty reductions in income tax in 2008.
It was Gonzi who dangled this carrot in front of all clases, higher, middle, lower, in order to win votes. And Gonzi actually sold the idea that LOWERING income tax would actually result in an INCREASE in government revenue!
It was actually being sold as a solution to the deficit prioblem. And Gonzi even justified his promise of reducing taxes BECAUSE he saw the “maltemp gej”, not IN SPITE of it.
Joseph Muscat is NOT advocating a reduction in taxes. He is simply holding Gonzi to account. And, yes, we know that by 2012 the situation will be so good as to permit the government to reduce taxes, in preparation for election year. Don’t we all know the script by heart?
[Daphne – Albert, you are obviously not a moron nor deranged by the chips on your shoulder. Therefore the only reason I can think of why you vote Labour and are so defensive about it is that you were raised in a Labour household and think that letting go of this ‘tradition’ would be tantamount to disloyalty to your parents and their pro-Mintoff, anti-PN beliefs.
The fact of the matter is that the Nationalist Party promised income tax cuts in February 2008, was elected to government in March 2008, and the world economy more or less collapsed in September 2008. It rightly put that particular pledge on hold, which is different to ditching it altogether, though right-thinking people would rather the pledge be reneged upon than implemented in a situation which does not warrant it, causing more difficulties than it solves.
Yes, Joseph Muscat IS calling for the government to fulfil its pledge immediately and cut income tax – not that he actually wants the government to do that because then he won’t be able to beat it with that particular twig. He is doing much more than holding the government to account. He is revealing how basically unintelligent he is and how he is incapable of analysis of an overall scenario – but we knew that already, because most of us remember him on Super One insisting that we vote against EU membership because it would be the end of Malta if we joined. And then he needed five years of hindsight to work out not that EU membership was the best thing that happened to this country, but that – that’s right – the Yes vote won the referendum.
Have you any idea how many people can’t forget that he tried to damn us through his cussed stupidity and lack of insight and foresight? I’m one of them. Every time I see his picture I think to myself ‘This is the man who worked so hard to destroy my sons’ chances, just as Mintoff worked so hard to destroy mine. The difference is that Mintoff succeeded but Muscat, and I helped make sure of that, did not. But not for want of trying.” And I will NEVER forget this. Christians forgive but only fools forget.]
Albert with all due respect, this is not a question of what Gonzi or Muscat promise or say but it’s a question of one’s maturity to objectively assess who is making sense and who is not in the context we’re living in.
I understand the emotional frustration of an ideological Labourite wishing his party to be in power, but that should have suggest a rational decision when the triad was chosen! Joseph was never fit for the job – the other two even less.
Daphne,
So true and so sad. To think that I went to sixth form with the guy. At that point I was already dreaming “EU”. Was he already planning his singleminded attempt to achieve “greatness”? It didn’t look like it.
As for the EU membership issue, Mr “I-want-to-run-this-country-at all-costs” had a single bullet-point in his agenda: oppose the Nationalists on whatever stance they take.
However he’s not morally convinced of his approach, and this is what makes him different from Mintoff. One day he will see what a fool he made of himself.
If “he is not morally convinced of his approach,” then that makes him different from Alfred Sant also.
Albert, it was not only Gonzi who dangled carrots in front of the gullible electorate. The MLP came out with bigger carrots dangled in front of us , like cutting the electricity bills by half.
So yes I may agree with you that this ‘carrot’ will be ‘eaten’ in the last budget. But like me you can foresee that it is attainable, and I, like you, can foresee this ‘script’.
Now, imagine for a moment,what the MLP’s “cutting the bills by half carrot” would have meant. It would have meant that the middle class would pay more taxes to subsidise the bills of the rich amongst others, and instead of reducing the income tax we would have suffered an increase.
No one would bother to invest in alternative energy and no one would give a hoot if the water heaters and ACs were left running all day long, our power station would experience an increase in demand and we will be told that Gonzi PN did not think ahead for a new power station.
In the meantime we would have been fed double the BS GonziPN fed us, while we experience power cuts.
Albert, we’ve been through all this predictable ‘script’ under Mintoff, Karmenu Mifsud Bonnici and Dr Alfred Sant. We were told by Mintoff himself that he was not able to bring employment to Malta, (who would dare do such a thing with a scarecrow like him in government?).
We have been told by Alfred Sant that Mater Dei hospital would be demolished (gebla gebla), and he doubled the amount of beds and changed it from an acute to a general hospital. Labour also promised the removal of VAT and cash registers and we got CET instead with a bigger ‘hofra’.
In the 80s KMB promised employment and we got 7,000 employed with the government entities on the eve of the 1987 elections.
Dr Joseph is not the material for an opposition leader, let alone for a prime minister.
Voters should vote for Dr Muscat not because Gonzi did not materialise some promise in his third budget, but because he can convince us that he knows a better way to bring us better paying jobs.
If there only would have been Dr George Abela at the helm of the MLP, we would have been arguing (and maybe agreeing) at a very higher level.
Good piece. It’s a good idea having guest posts on your site.
A very interesting article indeed. The author wrote:
“Malta has been hit only slightly by these successive international crises. We are one of just a few European countries to have a budget deficit close to or within the rules next year.
This is especially in our interest because we run the risk of being lumped with our EU Mediterranean neighbours by financial markets and by investors who cannot afford to invest in crisis-hit countries.”
I fully agree with all of this and I also say that it is not only in our interest to have a deficit of less than the 3% of the GDP as defined by the EU, but we can even achieve competitor advantage from this.
We now have a case where most of the EU countries such as Greece, France, Spain, Italy, the UK and others are facing a seveer financial crisis – with very little hope of putting their financial houses in order and under the 3% deficit by the next two or three years.
This means that if we can achieve the less than 3% deficit as per the EU rules, then we will be one of only a handful of European countries to achieve this and hopefully our finacial stability rating will go even higher than the current A+.
If good marketing is employed this can pull investment to our country because what an investor looks for is political and financial stability in the country he/she is investing in – and the chance to make a profit before investing.
The UK, France, Italy, Greece and Spain constitute a formidable political bloc within the EU. Let’s see if they respect regulations that will harm their economies in the short term.
The major advocate for fiscal restraint is Germany and it seems to be losing.
Do you read the papers? Or is it a case of me misinterpreting things?
Bite your nails, Albert Farrugia!
For as long as the fiscal deficit to GDP is above the target of 3%, it means that the government is overspending whatever income it receives from taxes and other recurrent sources (except borrowings), and therefore, the government spending is driving the economy.
Any tax cuts at this point would increase the fiscal deficit, and would increase the public borrowing which, according to economists, can “crowd out” private sector investment.
In other words, investors will be attracted to placing their cash with the government for the interest return on its public borrowing, rather than investing in the real economy.
Is it possible that Joseph Muscat’s economic consultants do not tell him this?
Tax cuts in a weak recovery, which is what we are experiencing, will not result in a growth of the economy, because putting more cash in the hands of scared investors will just find itself back into government bonds – see the trend of international stock and capital markets, and government bond yields, in the past year.
People were scared of corporate equity investments and placed their investments in bonds.
In particular, since the international economy is still weak, demand for our exports and for our property is weak. Therefore, tax incentives will not be spent in paying overtime or additional production capacity, but will just be hoarded until confidence returns.
During the Bondiplus interview Joseph Muscat implied that he was not merely taunting the government for not keeping its promise but admonishing it for not lowering income tax, a measure he believes in.
The Nationalist governments lowered income tax on a number of occasions with the desired effect. Timing is the key word here. It should be borne in mind that the promise to lower income tax came concurrently with another promise, that is to turn the deficit into a surplus.
After the election the government had two choices open to it, either to attempt to reduce the deficit at all costs or to help prop up a number of floundering companies. The government wisely opted for the latter. If and when the deficit is reined in, reducing tax will become an option.
It will not be the government that will be determining when the finances are sound but official statistics issued by the EU. Should this come about on the eve of an election then tough on Labour.
A really interesting article. There is one flaw though, and I’m afraid the author gives the game away all too easily. The article rightly criticises Joseph Muscat for not understanding that in a small economy like Malta, there are too many leakages for macro measures to work as effectively as they do elsewhere.
But then, just two paras down, the author quotes ‘sound economic theory’ to argue that income tax cuts – whilst reducing government revenues in the short term – would increase government income in the longer-term.
Selective use of theory to fit particular arguments is symptomatic of people who think they are economists. The lack of a byline only emphasises the author’s insecurity.
[Daphne – It has nothing to do with insecurity, believe me. And the person who wrote it is not an economist.]