Why Labour risks a bailout
Simon Busuttil’s article in The Times today:
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.
Dr Muscat was reported in The Times as having “rubbished” my claim.
The last time Dr 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.
Dr 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.
First of all the Fitch report 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.
But 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 3% 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 evidently 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.
And 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 guarantee 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. Which is a gimmick.
This alone would put our budget deficit outside the 3% limit not just for a year but for several. It would turn the European Commission’s spotlight onto us. Investors will start getting worried and rating agencies may 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 the 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 some 18,000 people, regardless of the outcome of an impending court case – this bill would run into tens of millions of euro.
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 Airmalta. 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-envelop 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. And 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.
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Errrrr, hello……….Malta is €4,000,000,000 in debt and you cannot blame Labour for that figure.
…at about 70% of GDP, the Maastricht criteria being under 65%.
While in countries in trouble such as Italy, it stands at over 120%
A small part thereof is due to a minority of the NP’s policies and/or appointees.
The vast bulk of the debt, however, is due to over-employment in the public sector (such as the 8000 employed just pre-1987 elections and who were not sacked thereafter), funding of white elephants (drydocks, sea malta, etc), and wasteful policies (such as subsidised fuel and electricity, ignoring inadequate pension contributions, etc) which are Labour legacies.
The NP has unfortunately been too slow to tackle these issues. On the other hand, the LP caused these problems in the first place and their current policies (e.g. further W&E subsidies) or non-policies (nothing re pensions) will make things much worse.
@ K and Homer
Whoever has the national debt at 120%, had it at 70% at one time. Its the same path we’ve been following over the past years, especially during Gonzi’s reign, only others got there (in the s**t) before us.
Nothing to brag about don’t you think?
Hang on a minute, both of you. There really is no correlation between debt-to-GDP ratio and economic performance. That’s one the mysteries (is it?) of the credit rating system. The USA’s debt is 100% of its GDP. Yet it still borrows comfortably in the 0-2% range. So is Japan’s. Germany’s is above the fabled 65%.
As long as the economy keeps growing we will eventually pay off the debt.
You should look into what this debt is financing.
In the 90s EFA financed a huge number of sectors and privatized others. Particularly crucial was the telecommunications sector (During Mintoff Telemalta was a loss making co. Lm1.5M yearly and unreliable service). Today telecoms (internet, mobile, digital broadcast) matured offering jobs and foreign investments opportunities.
So at the end of the day the debt paid in the 90s generated more economic activity and more than paid for itself.
Similarly today a lot of investment (incurring more debt) is aimed to improve the country’s touristic product (roads, infrastructure, historic sites, waterfront), this will bring benefits for years to come, which will eventually pay off this debt.
The big challenge a potential future Labour government has ahead of them is to maintain the economic growth, something which they still need to convince the general public about.
Alex Ellul I have no clue who you are.
You have hit the nail on the proverbial head.
Well done.
Very few natives indeed, however, can understand the difference between debt and investment for return. How many of them know that they owe their job to investment by the state ?
The overwhelming majority hear about dejn and hofra and kaxxa ta’ Malta and know nothing about anything.
So they will happily vote PL and **** the country in the process.
Can you tell us what jobs and revenue will the new parliament and the bridge to nowhere, bring ?
There is actually a bigger fear here than just an economic one.
Should a future Labour government go cap in hand to the EU for a bailout, the money will come at a price.
The European Central Bank will see to it that there are proper budget policies in place to ensure that it would not happen again.
The austerity measures that will be imposed on Malta will not be those promised by Joseph Muscat on the eve the next election.
There will be an uproar in Labour ranks and the old Mintoffian adages of “foreign interference” and that horrible “us and them” syndrome will come back to haunt the country with a vengeance.
It is doubtful that this Joseph Muscat will be able to keep the ranks together.
One has to keep in mind he is surrounded by dinosaurs much craftier than he is and that it was only a few years ago that Labour was dead set against the EU (ostensibly Joseph Muscat as well). The temptation and the pressure will l be there – to pull out of the euro zone, go our own way and to hell with bduget controls.
And if there is one political party that is myopic enough to do that, that’s Labour. It will be the beginning of the unravelling of successive National Party foreign policy achievements. There are people within Labour’s ranks who must surely be looking upon that prospect with glee.
This Joseph Muscat will not know what hit him, nor how to handle it.
You are implying that we will return to the Malta lira with the pala tal-bajtar and Agatha Barbara on it.
That is not an impossible scenario.
I have expert opinion that in that case one Malta lira will be worth one euro. This is a devaluation of around 60% over a relatively short period.
It will be catastrophic.
This is exactly the situation that recent Greek governments have been desperately trying to avoid.
What tyhe Maltese people are sure of is that Lawrence Gonzi is not capable of offering a stable government. Not now nor in the future, since it is his style of leadership that has caused all his problems in parliament.
Dr. Muscat has a completely different style. Indeed Dr. Muscat has succeeded in attracting EX-GONZIPN supporters to his election team. On the other hand, Dr. Gonzi’s desperate attempts to keep clutching to power at all costs, is distancing more and more people away from his clique !
It’s also worrying if one had to consider what he thinks of those who’ve invested in government stock.
People put their savings when and where they’re confident they’ll receive a return. Saying a country’s debt is locally held doesn’t carry an inverse, unless one wants to distort basic rights.
Is Joseph Muscat saying his government won’t feel duty bound to repay, that somehow, his election will give him the right to tamper with people’s money?
If he doesn’t care what the courts say, whose money is it?
The ramifications are endless.
Jozef: The scaremongering game is not getting Lawrence Gonzi and his clique anywhere. What hope have you then ?
Oh, so posing legitimate questions is scaremongering is it?
I believe that there is a simpler explanation to this and history will repeat itself just like what happened in 1996 with the VAT fiasco. JM is promising that he will lower the utility bills and everyone knows that this would be difficult because of the fluctuating price of commodities.
Labour will be in power and everyone will stop paying their bills, waiting for the reductions. Reductions will never come and Enemalta will be short of money. The only way to replace that money is to ask for a bailout or increase the taxes.
Li ma qalx Simon hu li bil-policy ta ‘Futur li jghaqqadna’ l-ekonomija tant ser tikber li nkunu nistghu nhallsu ghal kollox minghajr ma niddejnu.
Sa issa, li ma nafux hu kif se tikber l-ekonomija fil-Futur li Jaqq-Ghadna.
Joseph Muscat jahseb illi l-ekonomija se tikber jekk “irahhas il-kontijiet.”
Dan ma hux korrett.
Jekk jorhsu il-kontijiet, ikun hemm izjed konsum ta’ energija li trid tinxtara minn barra, u li allura twassal ghal leakage mil-ekonomija. Il-pajjiz xorta jrid igorr il-piz tal-prezz internazzjonali taz-zejt. Il-gvern ikollu jew jintaxxa, u allura jerggha jcekken l-ekonomija, jew ikollu jiddejjen.
Id-dejn tal-gvern hu maghruf li johnoq l-ekonomija, ghaliex dan juza tifdil li seta’ intuza b’mod produttiv mil-privat, izda f’dan il-kaz ikun qed jintuza biex jiffinanzja d-dejn tal-gvern fix-xiri taz-zjut.
L-ekonomija tikber bl-investiment tat-tifdil f’attivita produttiva, zieda fil-produttivita, dhul ta’ flus minn barra (turizmu, esportazzjoni). Sa issa, Joseph Muscat ma ta l-ebda indikazzjoni kif ser jaghmel dan.
Do you realise that more sense has been spoken in the comments to this blog post that in five years of Labour policy-planning?
Yes, Baxxter, you are right.
If Joseph Muscat really intended to come up with a robust policy document that makes sense, the first thing he had to do was to set up a blog like Daphne’s.
Of course, the second thing he had to do was to copy the policy-making from Daphne’s blog.
H.P. Baxter: Do you also realise that NO ONE , except the hard core supporters of GonziPN, is believing Lawrence Gonzi anymore ? Check the opinion polls, even those of GonziPN, to find out,if in doubt.
Are we very bright or are they just incredibly stupid?
I leave that sort of thing to PN supporters. I’m just here to point out Labour’s skullfuckery.
I cannot understand how all of you blab about Joseph Muscat not lowering the W&E rates. Trust me he will, but the real question is how will he fund that shortfall in revenue?
Has anyone asked him what his plans re his tax bands are, because my gut feeling is that the we are no longer going to have 35% as the maximum tax rate.
Oh, is Joseph going to lower the 35% tax rate too? Super.
Ciccio: Have you forgotten that the promise to lower the tax band from 35% to 25% was made by Lawrence Gonzi ????
Why not ask Dr. Gonzi if he has the cheek to promise it once again ?!
Why not ask your Joseph whether HE will lower it?
Eddy, why don’t you wait until the end of the legislature?
But meanwhile, I have to point out that Gonzi did not promise to lower the water and electricity rates, to introduce the living wage, to refund VAT on cars bought years ago, and to freeze the minimum wage.
MLP, PL, Moviment bla isem or whatever they call it nowadays, is promising to reduce utility bills, if elected. Alfred Sant in 1996 promised to remove VAT. When elected he removed VAT, he did not remove the audit trail, and did not know what he was going to replace it with – he eventually introduced CET.
Dr. Joseph Muscat is promising to reduce water and electricity bills but is not saying from where he is going to get the millions of euros to be able to do so. The deficit will grow larger and so will the national debt – as happened between 1996 and 1998.
Otherwise, he will have to get the money from us somehow. He will give us a one hundred euro reduction on utility bills and increase Income Tax by 100 euros (for example).
When the MLP increased utility bills in 1997, Eddie promised to remove the increase altogether and he kept his promise. Will Joseph Muscat promise to reduce utility bills to the levels they were in 2008 or will he just reduce the bills slightly?
If the latter is the case, it would be just a gimmick. He would also be accepting the fact that Water and Electricity bills had to increase and the only difference would be by how much?
Actually the Euro Convergence Criteria set the debt to GDP ratio at 60%. Malta’s debt is currently at 75%. Without Italy and Greece as a benchmark, Malta’s debt is still lower than Germany and the EU Average (set at 88%).
I also find the debt to GDP ratio as one indicative factor in assessing the health of an economy, but by no means is it the only indication. To put the matter into context, Spain has a lower debt to GDP ratio to Malta, but I doubt anyone would wish to trade places with Spain at the moment (football glory aside).
Conversely, Japan’s debt to GDP ratio exceeds 200% – yet it’s default risk is considered minimal.
In any case, it is clear that the advantages of having no debt at all is an infinitively better than being saddled with debt. Alas, debt is a symptom of our times – living beyond our means. I personally have an aversion to debt, and shall never ever be in debt ever again.
I shall however be forever INDEBTED to the person who can knock some sense into Franco’s & JPO(s)’ mind!
And now he’s saying that they will increase the stipends.
I’m sorry, but if you have a solid policy base that guarantees them being elected, there would be no need for them to promise everything under the sun just to get all the votes he can get.
People please free your hearts from minor resentments (read favours thought of as right but not given) and open your eyes….if they keep all the promises they’re making they’re going to ruin us; if they don’t, they’ll still run the country to the ground and all of you will still remain empty-handed.
Don’t twist Dr.Muscat’s words, as Gonzi likes to do. Dr. Muscat said ” Strenghten stipends ” !
Mr. Privitera, what is the meaning of “strengthening stipends”?
Is it like “Gvern gdid Laburista innehhi l-VAT”?
EU apparatchik Simon Busuttil prefers playing the partisan hero rather than having to explain the horrendous monstrosities taking place at EU and eurozone level.
[Daphne – Kevin, I deleted your lengthy treatise because it was longer than several of my newspaper columns put together. This is a COMMENTS-board.]
Did you and Simon Busuttil ever meet, Kevin? That would be interesting.
Before I read Daphne’s comment, I thought, Wow, Kevin has finally learnt to keep his comment short and sweet.
I hate it when I am wrong.
A brief description of Kevvy: He comments on blogs (usually lengthy), tries to be important, but can’t find a job, although he appears to be an experienced dish washer.
Joseph Muscat.
From the hangout to the bailout.
In light of Simon Busuttil’s article this is how I see it.
I can’t help but think that Labour just wants poor people to be poorer so long as those who have money have less.
And I’m not talking about the mega rich who have millions of Euros in the bank, but those who live a comfortable life with no money spent on excesses. That middle class he goes on about might very well disappear thanks to the PL.
There will be no new middle class under the PL, but a new under class of people who work just to have all their money taken away to fund their bad policies and the consequences of their folly.
And with it will go the social services, because there will be no one in Malta with enough money to pay for them. So those who deserve the social services will end up with nothing. The poor will be poorer, and the middle class, poor.
Good intentions must be accompanied by good policies. It’s not enough to say “but my intention was good”.
There have been many attempts to help the poor in other countries, but some of those attempts resulted in Communism where the whole country was reduced to rags and the only reason why class-ism didn’t exist was because poverty was the norm.
Which is what those bastards wanted in the first place, everyone at their feet begging them for help and owing them their lives as they exerted more of their power over their people.
The government doesn’t owe you social status. That is something one must take responsiblity for oneself. Making it in life is often a gamble, but always gives you a great sense of independence.
Relying on a government to make you middle class is deluded and dangerous, and in my opinion means handing over too much power to a government. ” I made you the middle class, now do as I say or I ll take it away”.
I find this promise of a middle class a threat to the freedom of the Maltese people.
But I wouldn’t expect Muscat to understand this seeing as he was brought up in an environment where it was a good thing that the government controlled every aspect of life to keep things “fair”. Perhaps he will never understand the real European values of the work ethic and independent self reliant self made individuals.
Yes I do wish life were easier. But I would rather struggle through life as a free man, then float through life in a straitjacket.
Edward Caruana Galizia: Do you happen to be a relative of Daphne ? The way you write makes me think that you are !
[Daphne – Mr Privitera, Caruana Galizia is my husband’s family name, not mine. Not all of those who can write and think are necessarily me in disguise or my offspring/parents/siblings.]
Eddy Privitera: Do you happen to be a relative of Luciano Busuttil? The way you write makes me think that you are!
Wehilt Privitera mid-dehra.
Kull meta xi hadd jaghmel argument taraw kif titfghu d-disprezz taghkom fuq il-persuna.
Hawn eluf li jahsbuha b’dal-mod, x’beshiebek taghmel, tipprova turi li kollha nigu minn Daphne?
Cuc Joseph ha nghidlek, li halliek tersaq lejn il-qalba biex issa ha tgerrixlu l-voti. Jew mwerwer li Joseph jista’ jinsik u mohhok biex izzomm il-partit fejn jaqbillek?
Kompli sejjer hekk Eddy, Ibqa’ urina kif fil-Labour jezistu nies li ma jahmlux n-nies habba l-ideat taghhom. Sabih il-moviment, ilek gimgha titghajjar u thammeg nies li qas biss taf min huma.
Min jaf il-Mile End x’joffenduk, balalu.
Simon: Just remember all the things you had said prior to the EU referendum. And the what you wrote to the hunters and trappers, namely, that they would be able to continue hunting and trapping as they had done in previous years !
I remember Saviour Balzan telling Simon: ” I could remind you of all the LIES which were told to the people ” by MIC, about EU membership , when Dr. Busuttil was its Head !
What you wrote in The Times today does not deny the fact that what you wrote was irresponsible and can only create doubts in the minds of foreign entrepreneurs, a tactic used by the PN in the 1970s and 1980s
We have a foreign entrepreneur here. Let’s ask him. Harry, did Simon Busuttil create terrible doubts in your mind?
And Mr Privitera, it is a trifling point but an important one: you will please give Simon Busuttil his surname. We don’t want him to end up like your Joseph.
Simon Busutil didn’t tell any lies. All the reasons why I wanted to join the EU have come to pass. And not just for me but for everyone.
Mr. Privitera, it was not Dr. Simon Busuttil who told us that Malta will only benefit from 1 million Maltese lira of European funds.
And do you remember that Made in Brussels program? I can’t remember who used to present it – did you keep any copies of it?