Dominique Strauss-Kahn, who heads the International Monetary Fund (IMF) on Monday joined the chorus of economic practitioners who are calling on governments to leave more money in people’s pockets to cushion the impact of a global recession.
Strauss-Kahn advised governments to use fiscal policy as a tool to stimulate domestic demand. One option put forward by the IMF Head was tax cuts, even if it meant further borrowing by governments to finance the measure.
Another measure suggested by Strauss-Kahn was directed towards central banks. He argued for more interest rate cuts, especially by the European Central Bank, to leave more cash in the economy and make it easier for businesses to invest.
Obviously Strauss-Kahn’s comments need to be viewed within each country’s respective context.
Last week this leader clamoured for a meaningful tax cut and a gradual phasing out of the subsidy to Enemalta, rather than the sudden death approach government has opted for.
In addition to what has been proposed in the budget, these two measures could have provided a further stimulus to the economy, especially in the 12 months ahead.
This leader is conscious of the fact that what we are suggesting also means government would have to borrow more and hence run a higher deficit in 2009.
While normal circumstances would dictate otherwise, 2009 is anything but a normal year. With Japan being the recent addition to the ‘recession club’ after Germany and the whole of the eurozone, the world is in for the roughest ride in 80 years.
Based on 2008 figures, by maintaining the subsidy to Enemalta, government would be increasing its deficit by upto one percentage point of GDP. The Finance Minister’s projections put next year’s deficit at 1.6 per cent. Increasing that by one percentage point would still leave Malta below the three per cent mark and avoid shock therapy to the economy.
Indeed, with the price of oil dropping, the Enemalta subsidy might even equate to less than one per cent of GDP.
If a meaningful tax cut also amounting to one per cent of GDP were to be implemented that would still put Malta’s deficit next year at around 3.6 per cent.
We realise that course of action would increase our debt, which is still on the high side for any economist’s liking. In the circumstances, we believe that keeping afloat in the next 12 months is much more important than the longer term objective of balancing the budget.
While the economy is not yet in a recession and is most likely to keep its head above the waves for the short to medium term, we cannot act as if the rest of the world is an alien place. Indeed the first signs of gloom have already reached our shores with the strain being felt in the tourism and manufacturing sectors.
As long as government keeps a tight hold on its recurrent expenditure avoiding the extravaganza it indulged itself in because of the election, we believe that once the storm has rescinded the zero deficit target, or rather surplus, could be achieved by 2012 or 2013.
Strauss-Kahn’s comments convince us further that Budget 2009 could have gone much further in providing an economic stimulus package to see us safely through the next 12 turbulent months.
