Issue link: https://maltatoday.uberflip.com/i/1305625
maltatoday | SUNDAY • 1 NOVEMBER 2020 12 BUDGET2021 THE 2021 budget has targeted the first and hardest hit households. The main objective was to avoid vulnerable com- munities ending up bearing the eco- nomic brunt of the crisis and prevent slippage into poverty levels. The plan of supporting those catego- ries by guaranteeing a basic income and lowering their tax burdens appears to be indicative of a radically new approach to public spending: that of trusting the ability of the lower and middle income households to drive and support the economy, or "trickle up economics". Lately, figures have not been encour- aging. The most recent Labour Force survey has indicated that the monthly basic salary of employees in the second quar- ter of 2020 dropped by 8.6%, when com- pared to the previous year. Moreover, the number of average ac- tual hours has gone down from 39.6 in April and June of 2019 to 34.1 in the same months in 2020. This means peo- ple are both working and earning less. The pandemic has, to a large extent, exposed the fragility of our social safe- ty net. The most illustrative example is the wage supplement scheme of €800, which exceeded the monthly minimum wage by €23. In this respect, it may also be said that the pandemic has accelerated the effects generated by Malta's rapid economic expansion, which was already resulting in increased difficulties for the low- er-income categories and the noticeable falling behind of the lower-middle class. Moreover, social inequality was char- acterised by a strong generational dimension. Among those facing the harshest consequences were the young, as it became obvious that they were inheriting an economic system which would not grow that rapidly for them, as it did for their parents and grandpar- ents. For these categories, the problems had started well-before the outbreak of the corona virus pandemic. Government appears to have now tak- en note of this reality, and is respond- ing through a set of targeted measures which are mostly meant to avoid the worsening of the economic and social crisis. The extension of the wage supplement and the income tax refund schemes will sustain those individuals who are at risk of losing their job, whilst the increase of the VAT exempt threshold from €20,000 to €30,000 and the broadening of the in-work-benefit scheme crite- ria (aimed to assist couples and single parents who are employed and have de- pendent children under the age of 23) are measures to prevent households from sinking into further economic hardship. But should assistance be targeted sole- ly towards the lower income-earning households? Clearly, the difficulties are not limited to these groups. The middle class, which in Malta translates into all those individuals earning between €15,000 and €40,000, may also require support to maintain their economic weight. Keeping the same lifestyle will be a challenge for individuals whose income has stagnated, particularly as costs of housing and education keep taking a large portion of their earnings (housing, by itself, may take up as much as one- third of disposable income). Handouts for these categories, how- ever, might prove to be both expensive and ineffective. A solution for such income groups might lie in the provision of improved and better-quality public service, capa- ble of reducing their overall costs and saving, as much as possible, of their dis- posable income. Future policies would, therefore, have to be targeted at provid- ing affordable accommodation for the middle classes and raise the quality of public hospitals and schools. The measure of dedicating €20 million in funding to ensure state schools ad- here to COVID-19 protocols might be taken as a possible sign in this direction. Of course, the strengthening of such public services requires a steady stream of fiscal revenue, which will inevitably be narrowed by the lowering of the tax burden on labour in-come. The system will, therefore, come to depend much more on the taxing of capital gains, property and inheritance. In this light, the measure to widen the tax-free threshold on inherited proper- ty and extend tax reductions on sale of property appear to be in conflict with the direction suggested by this budget. The key fact, however, remains that the pandemic appears to have drawn our attention to the symptoms of ine- quality which had started manifesting themselves in the Maltese economy, even before the COVID-19 outbreak. In a way, these challenging times are giv- ing us the opportunity to heal some of these chronic illnesses and enabling us to become a radically fairer and more sustainable society. Is the 2021 budget an exercise in trickle-up economics? OPINION Kurt Xerri Kurt Xerri is a member of Rethink, a social policy think tank • info@rethink.com.mt