Issue link: https://maltatoday.uberflip.com/i/744537
14 IF ever there was a job to which the old saying 'you can never win' applies, surely it would have to be the Minister of Finance. Tra- ditionally, as the man who holds the key to the national treas- ury, he is inundated with pres- sure from Cabinet colleagues demanding ever-increasing al- locations. And once the annual Budget exercise is complete and presented to the public, it is the Finance Minister who must bear the brunt of popular outrage at unpopular decisions. To be fair, the job has its perks. In times of economic health – when international credit ratings agencies upgrade Malta, and the Budget delivers more 'goodies' than nasty surprises – it is gen- erally the Finance Minister who takes all the credit. From both perspectives, Budg- et 2017 seems to pose a slight departure from the script. The government touted it as an ex- ercise in social responsibility... a Budget that 'left no one behind'. The social partners by and large agreed... but while welcoming the more generous social initia- tives – such as a doubling of the rental subsidy to low-income earners, or the 'extra' increase of COLA (cost of living adjustment) to €1.75 – many of the reactions also indicated disappointment that they did not go far enough. Caritas and NGOs such as the Anti-Poverty Alliance have re- iterated calls for an increase to the minimum wage. In particu- lar, the rental subsidy measure was singled out for criticism on the ground that it might jack up rental prices. It seems a good place to start when I meet Prof. Edward Sciclu- na for this interview. Apart from the possible inflationary effect on the rental market, other meas- ures such as the conversion of the Eco Contribution to an excise tax are likely to be passed on to the consumer as higher prices. Given that Caritas is already warning that minimum wage earners can't afford basic necessities at current prices... isn't there the danger of inadvertently causing more pov- erty through Budget 2017? "You're joking, right?" Scicluna begins. "We calculated the effect of the eco contribution as an ex- cise tax, and it roughly translates into 6c per person per year. That this might cause an inflation- ary spiral is absurd. Inflation has never been lower in our whole lifetimes. And it's not all thanks to us; I'm not taking credit for it. It's a worldwide phenomenon. In fact, our concern and fear was deflation. I still remember having meetings in here, seeing whether prices would follow a deflation- ary spiral like they had on the continent. But they didn't. We're currently under 1%, and it's been like that for a few months now..." All the same prices are increas- ing, even if by little. The question becomes, are salaries increasing in step? If the minimum wage hasn't gone up but prices have, those people are still on a down- ward trajectory... "What do you mean, the mini- mum wage has not gone up? Sor- ry, but it has. The agreement was that it would go up by what Eu- rostat, etc, determined the prices went up by last year... and it was found to be €1.16c. The govern- ment went a step further, and said 'let's round it at €1.75." But that's the Cost of Living Adjustment. It's not an actual increase to the base minimum wage itself. "It still gets added to the sal- ary. Bear in mind that these are not government salaries. The government has no minimum wage employees. It's the private sector; it's the market. In this market, with the current levels of competition, that's how much they can afford. If workers are truly underpaid, they can move to another enterprise. Did you know that in Italy there is no minimum wage? In Britain, it was only introduced under Blair in the 1990s. So what? There is life without a minimum wage. It's a government intrusion..." Is he suggesting that a Labour government has no business to be intruding into the labour mar- ket? "It is better to have a living wage... by that, I mean a bench- mark to aim for. For example, a family with two kids should earn that benchmark; that's the living wage. Are they earning it? If the answer is no, society must adjust. Let me refer you to a recent Mis- co study, which found that wages are increasing by slightly more than 5%. Who dictated that? The government? No: it depends on other factors such as productiv- ity. Now: if the government is to intervene to help low income brackets... should it intervene by legislating so that the private sec- tor must pay all employees the salary of a family with two kids?" That last part is an assump- tion... what Caritas suggested was that minimum wage earn- ers should earn enough to enjoy a decent standard of living. And the request must also be seen in the context of sky-rocketing liv- ing costs. Rent, for instance. We just carried a story about how rental prices in Sliema have in- creased by 80%. And according to the Anti-Poverty Alliance, you won't get an apartment anywhere for less than €400 a month. How can someone on the minimum wage afford that? "Eighty per cent of households in Malta own their property. Their concern is more with the interest on mortgages than with rent. It is a big problem for those who are affected by it, but it's not a national problem. Most of the tenants are foreign; it's a very small segment who don't own property and have to rent. Is that a concern for the government? Yes it is a concern..." This brings us to a more spe- cific Budget measure. The gov- ernment has doubled the rental subsidies... while stopping short of actually regulating the rental market. Admittedly it is a con- troversial proposal, among peo- ple who treasure the free market economic model... but given the rate at which rental prices seem to be spiralling out of control: aren't there valid economic rea- sons for the government to inter- vene? "The only remedy is increas- ing supply, not rent control. You cannot fight the market; you have to address it, manage it... but you cannot fight it. If the pressure is up... Ok, you decide that, from to- morrow, landlords can charge no more than €300 a month. What would happen? I lived it. To get a contract for two years, you would have to pay €5,000 up front, Why? For 'the furniture'. That's how the pressure works. So the response is to let the supply take care of it. I'm not sure how many of the plans of new developments will actually materialise; but they will surely increase the supply..." On paper, that's how it should work. But Malta's property mar- ket seems to defy the economic law of demand and supply. For instance: has the supply of prop- erty gone up over the past year? "I would say it has." Then why haven't the prices come down? They've actually done the opposite... "Because the demand is in- creasing at a greater rate than the supply." Is that really the case, however? People in the property market are questioning whether there is enough demand for new luxury apartments. And that's another thing: it is the supply of top-end residential units that is increas- ing. The demand is fuelled by people who can afford to pay over a million euros for an apart- ment. There is even a govern- ment policy to attract this sort of client. Doesn't this distort the market slightly? "Let's take it one step at a time. If we want to protect housing up to a certain value... we can. Whatever you promote and give incentives for, you should not in- clude those types of properties, in order to protect them. But you can't promote Malta internation- ally, and at the same time, not expect rents to increase..." Precisely. Some might also ex- pect the government to step in, if the rental increase gets out of hand. Scicluna however dismiss- es rent control as a possibility. "Ideally, you support incomes. And then let the beneficiary de- cide how to allocate that money. The Caritas report, for instance, talked about food prices. Does that mean we should intervene to control food prices? We can't. It is a question of the cost of im- porting cereals, sugar, etc. As a small, open economy, we're at the mercy of those prices. Now: if there are people at the lower levels who can't cope... because the people in the middle and at the top, having incomes increas- ing by 4% or 5% according to that Misco study... they can afford a 3% or 4% hike in food prices. It's the lower income bracket that struggles. We have to address their income, not the price of food..." Scicluna insists that his job, as finance minister, is not to dictate to the market, but to distribute the wealth fairly. "You have to let the market function, but then you have to look at the whole picture. You have to decide: do you like what you see? Is it improving, or not? That is my white board. I look at that, and I'd be concerned if [poverty] goes up on my watch. So far – and I can prove this through various studies – all our policies from day one have been redistributive. Except for the 35% income tax cut, all the social measures and benefits hit the low end more than the top end. The result was that in 2013, the Eu- rostat indicator for poverty sta- bilised; in 2014, it went down. In 2016 and 2017, I can assure it will continue going down." To be fair, it is not the perfor- mance of the economy that is being questioned. But now that Scicluna raises the issue, we must also consider the cost of this pro- gress. The social measures intro- duced by Labour in this Budget – including the rental subsidies – are all funded by the taxpayer, as is the entire welfare system itself. By refusing to regulate the mar- ket, the government is constantly increasing its own expenditure... while private enterprises posting Interview By Raphael Vassallo maltatoday, SUNDAY, 30 OCTOBER 2016 The only remedy is increasing supply, not rent control. You cannot fight the market; you have to address it, manage it... but you cannot fight it Did you know that in Italy there is no minimum wage? In Britain, it was only introduced under Blair in the 1990s. So what? There is life without a minimum wage. It's a government intrusion RENT CONTROL MINIMUM WAGE 'You cannot fight the