When global economic shocks do not meet local political narratives!

Right now, I am closely following the effects of the war in Iran on the global economy. This situation underscores how interconnected the world’s economies are, as extraordinary events quickly expose unequal vulnerabilities. It is crucial to consider which groups in our economy will be most affected. Our country is no exception to these impacts.

To understand this, consider how, during periods of rapid economic growth, benefits are felt across all groups. Yet those at the upper end of the income percentiles typically do best compared to lower- and middle-income earners. I explained this in my preceding articles tackling the K‑Shaped economy. Top earners have more opportunities to benefit from economic expansion, often possessing dormant capital and better liquidity to invest. To illustrate, let’s look at what happened over the past decade in Malta.

For instance, those who owned land that could be developed, much of it included in the 2006 rationalisation under a Nationalist government, saw an opportunity in 2013 to develop and earn money. The push was for development because the country needed investment to boost the economy. This helped landowners increase their income and generate more wealth by developing, building, and selling or renting their properties. This situation has a cascading effect, or what economists call a multiplier effect. Additional foreign direct investment increased GDP and helped sustain such developments. Over the past decade, the increase in foreign workers has further boosted rental income for many, who are using it as an additional pension for those now retired.

At the same time, digitalisation changed the way we live, especially in flight and hotel bookings. Many took advantage of increased tourism and invested in properties to rent, using platforms like Airbnb and Booking.com. They are earning a good income, even though it comes with additional infrastructural costs. Still, it remains a good business for many, and over the past decade, people have managed to invest and earn money. I mention property because it is topical, and when things get bad, especially during global inflation shocks, the property market is highly affected as prices rise again. When the economy struggles, and inflation hits hard, the lower- and middle-income percentiles are hit the hardest. The higher income percentiles hedge for future risks and have additional income from rents or interest on other investments. The impact is cushioned more smoothly, and those at the upper income percentiles can weather the storm better than the rest of the population.

Given these realities, my point is that, considering what is happening now, neither the government nor the Opposition can promise much to the electorate, since the priority is to cushion the impact of energy prices and maintain current tax cuts. However, the PL government – particularly under Dr Abela – has greater credibility, having managed three unprecedented events with minimal negative impact on our economy, without increasing taxes or adding a fuel surcharge, unlike in 2009.

Malta’s economy has tripled in growth since 2013, and the PL has enough fiscal space to navigate what lies ahead. However, promising the impossible is not credible, and even Prime Minister Robert Abela knows this from experience. For instance, when we talk about lowering VAT to 7%, we need to examine the industry’s structural problems first. This is not about keeping 11% of the difference between 18% and 7% as liquidity to invest in training and retraining. I understand the industry needs some breathing space because liquidity may have been hit, just as consumers’ liquidity was hit by inflation. We were all affected. However, we need to be careful and first examine structural costs unrelated to the VAT rate, including BCRS, waste management, and rental costs.

When considering these proposals, it’s important to understand that the industry is characterised by monopolistic competition. This market structure drives improvements in products and services. Competition breeds healthier products, and whatever the impact of the VAT reduction, it is competition that has improved our restaurants’ products under a VAT rate of 18%, which was introduced by a Nationalist administration. Restaurateurs and caterers are hardworking, and this is evident in the products they offer to consumers. My understanding is that the VAT decrease will not lower prices, so in the end, consumers will not benefit. As I reiterated in my previous article, the difference is intended to be invested in other areas. However, these areas must not be overlooked, as training and other costs have increased over time, indicating that the root of the problem lies in other unrelated costs, not the VAT rate.

With the general election approaching, we will see many hawkish proposals. We must pay attention to detail and not overlook what is being promised. If it is possible to lower VAT to 7% – if the European Commission allows it – and consumers ultimately benefit, then so be it. But the money lost from the VAT reduction is an opportunity cost of funds that could be invested elsewhere, including energy subsidies to maintain economic stability. Normally, if there are too many restaurants, the market adjusts itself. The invisible hand of Adam Smith takes over, profits balance out, and the least cost-effective go out of business. The struggle in the catering sector to work harder for better earnings is not only about reducing VAT rates but also about keeping costs low, as I outlined in my article last November. Sadly, the political class in this country lacks economists at the helm.

When you look at our Parliament, aside from a few parliamentarians, I am not sure whether the problem is chronic or acute. However, we need experienced economists and financiers in Parliament to have proper discussions. When Clyde Caruana and Silvio Schembri speak about finances and the economy, you can tell they are competent. There are others from the Opposition benches, but their performance is sometimes poor because, even if the arguments are good, their technicalities lack the depth of intellect seen in government. I appreciate these discussions, but they must be informed and supported by proper economics. What we need are not just a few numbers thrown at the electorate’s face to win an argument but economically backed arguments that most of us can process, digest, and decide on when the time comes.

This article was inspired by loyalty. Loyalty to colleagues and the electorate is essential in a democracy. People are tired of populist promises. Voters want truth, bold decisions for Malta, and consistent integrity. Sadly, many see politics as a celebrity show. I believe competence will guide voter choices in the next election. And this is why I chose the title. Because, in truth, when global economic shocks affect our economies, they do not align with the local political narrative!