Exante’s Patrick J O Brien writes that, while the human and economic costs of the coronavirus pandemic are likely to be high, the Maltese Government has the fiscal capacity to support its citizens and workforce during these exceptional circumstances
More than a decade on from the financial crisis, the coronavirus pandemic is severely impacting people’s lives. This no doubt will intensify in the coming days and weeks. The scale, and therefore impact, of the virus remains hugely uncertain, so policymaking is difficult. Policies need to be robust to different eventualities and/or be flexible in the face of change.
While the human impact is central, the economic effects will be strong and widespread. A cool-headed and balanced response will help to achieve the best outcomes for everyone and should minimise the long-term impact.
The Maltese Government’s positive balance sheet should play a central role in supporting the economy in the short term and avoiding long-term damage. Additional support from the European Union will assist. The health system will be in the front line and will require the necessary resources. More widely, additional spending and fiscal support on a large scale is likely to be required to ensure that workers and companies are able to weather the storm as activity runs at a very slow pace and businesses are disrupted.
The Government announced billions of potential fiscal supports recently, mostly aimed at supporting those unable to work. This changes the immediate fiscal outlook completely. While at budget time Malta looked set to run surpluses in the coming years, the budget balance could switch sharply back into deficit.
Tax revenues will fall sharply, especially income taxes, social contributions and VAT. Added to the additional spending measures, perhaps by a significant margin if the downturn is more severe and larger fiscal measures are required.
This is the right fiscal policy in these exceptional circumstances. While such outcomes in normal times might raise alarm, the best response to the public health emergency and the economic downturn is to ensure the health system has adequate resources and to support people’s incomes, the continuity of businesses and economic activity. This will help to ensure that the economy emerges in the best shape and is able to support jobs and the public finances when health conditions allow.
While reiterating that an aid package was on its way as part of a mini-budget later this week, Finance Minister Edward Scicluna said the government could only mitigate the effects up to a certain point. Moreover, he added it would also be an impact on public finances. Government revenue will go down while expenditure will increase to offer certain guarantees, but the prudent approach to spending in Malta’s good times has created room for maneuver.
Most of the deterioration in the fiscal position would be expected to reverse as the economy recovers and when spending measures are no longer needed. With the right policy measures, this episode should be what economists would view as a textbook “temporary shock”. This is exactly the situation for timely, targeted and temporary policy measures. Allowing the budget balance to deteriorate temporarily should not lead to lasting damage to the public finances.
The Maltese and EU fiscal rules make provision for “exceptional circumstances”. This has been used previously in countries facing severe terrorist threats or for countries that were dealing with large inflows of migrants. It clearly applies to the current pandemic
Looking further ahead, many of the economic effects should reverse as the public-health situation improves in Malta and globally. It can be hoped that many activities will return to more normal levels within a reasonable time frame. Nevertheless, some of the effects may be long-lasting. For now though, the government should be focusing on ensuring the continued delivery of public services and measures to minimise the long-term economic damage from what will hopefully be a short-term increase in levels of illness.
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