A do Nothing Solution

23^rd July 2006
The Malta Independent on Sunday

There is momentum building behind a general impression that this government has damaged itself beyond repair and that the next general election is for the opposition to lose.

It is not an impression built out of thin air. It is supported by independent surveys showing that the opposition has held its ground whilst the government has disgruntled a good part of those that voted it power at last election.

There are three particular reasons why this has happened.

Firstly it is because that the government had over-promised regarding the immediate impact of EU membership and in people’s perception it is therefore under-delivering on the promised benefits. At next elections government will be judged on its performance as there will not be, as the EU issue was in 2003, a higher order issue which distinguishes the PN from the MLP and veils over the PN’s shortcomings on its performance in office.

Secondly it is because people tend to judge their government by the money in their pocket. Clinton had coined the dictum ‘it is the economy stupid’ to define this concept that government’s popularity depends on economic performance irrespective of government’s merits or demerits for such performance.

There is no doubt that on this score there are many disillusioned voters who care not so much that government has no control on international energy prices, but do care very much that the surcharge on their utility bills as well as the increase of fuel prices at the pump are chipping away at their standard of living just when the opportunities to earn something extra are hard to come by. In this respect there is rough justice being meted out seeing government tasting its own medicine considering it had ferociously criticised a Labour government for raising utility rates in 1998 following 16 years of price freeze.

Unlike, economists, central bankers, rating agencies and financial analysts such people are not the least impressed by progress made in controlling the fiscal deficit or the public debt. The benefit from such macro-economic successes will only cascade to the consumer at glacial speed through enhanced economic growth which is hardly visible and difficult to materialise in time for the next electoral test.

In fact government has seriously got its electoral timing wrong. The sort of fiscal discipline meted out in 2005 and 2006 should have been delivered in the first two years of the legislature in 2003 and 2004 giving such measures time to bloom into economic buoyancy in the years leading to the next general election. However the first two years of this legislature have been wasted through changes of PN leadership and the run up to EU membership. Government was in celebratory mode then when it really would have been in prescriptive mode.

The third and final reason for government’s loss of popular support is the decision to join the Euro in 2008. By so deciding government has bound itself with an additional wrapper of fiscal discipline which thankfully ( from a macro-economic point of view) does not allow much space for economic pump-priming for short term electoral purposes. Again this might earn the government applause from rating agencies and financial analysts but does pretty little to generate any feel good factor that tends to be the ultimate ingredient for electoral popularity.

Many other countries that joined the EU with us in 2004 have now resigned themselves that the Euro bar is too high to reach in the short term and are planning Euro membership in 2010 or later, no doubt keeping the domestic electoral calendar in mind as well. We chose to plod on regardless and are taking a very serious risk of finishing with an egg on our faces this time next year if, like Lithuania, we fail to make the grade for Euro membership. We seem particularly tight on the inflation test and given that inflation is calculated on a moving average basis for the year ending March 2007 and that there seems pretty little we can do to change our fortunes. One has to bear in mind the considerable time lags before any measures we may take actually impact the measured inflation indices.

Against this backdrop the opposition is adopting a do nothing approach. If the government is sinking letting it sink as default presents the most practical way of regaining the electoral mandate without having to be very specific about the opposition’s own policies. Policy document updates are therefore understandably vague on the methodologies and focus mostly on the objectives. They give the final destination without explaining, even in generic terms, the route to get there.

Its experience of the last three elections conditions Labour to such an approach. In 1996 Labour opposition adopted the removal of VAT as a major electoral issue as a matter of convenience not conviction. There is nothing in the socialist credo that should render VAT as more socially regressive than the high import duties it replaced. It worked. VAT convenience delivered the government mandate in the 1996 elections.

1998 election was fought on the conviction issue of governability and 2003 election was fought on the conviction that a partnership relation with the EU was more suitable than membership. In both cases the personal convictions of the Leader rode roughshod over many who did not share such absolutism and who wanted to put some electoral convenience in the political equation for formulating the policies on which the 1998 and 2003 elections were fought and lost.

Having been so heavily bruised by these electoral defeats it seems that Labour is again switching to the 1996 mode of letting convenience have the upper hand over conviction. Only this can explain Labour’s policy about pensions, as recently announced, which essentially is a do nothing solution as pension reform can wait.

Politically it is very convenient to face the next electoral test without having subscribed to the PN’s commitment to increase pension age to 65 years and to render pension benefits more directly related to pension contributions calculated on a span of 40 years contributions to reflect the longer time spent in active economic activity caused by later retirement.

Labour is correct in arguing that government’s pension reform is not exhaustive enough and should be seen alongside other reforms including the funding for the universal public health service and non-contributory social payments which currently are sourced from the pension fund with government having to finance the annual pay as you go deficit. Labour is also right in stating that part of the funding solution has to come from faster economic growth and increased participation by females in productive economic activities in order to widen the contribution base.

This does not mean however that pension reform can wait or that it is realistic to expect that under any version of widened or revamped reform one can escape the basic measures being proposed by government. The argument that reform does not go far enough does not mean that the few steps proposed, inadequate as they may be, should be discarded until we spend a few more years searching for the perfect solution which in any event will have to include such few steps.

A do nothing solution is a total victory for political convenience but it does nothing to make Labour life any easier once it is returned to government. Governments change but the inherited problems remains for instant ownership by incoming incumbents.