Friday, 31 October 2008

Who`s Comfortable with a Recession

31st October 2008
The Malta Independent - Friday Wisdom

This must sound really weird. Surely nobody ought to be comfortable with the onset of a global recession likely to be on a scale not seen since the early 1980s. But don’t bet your bottom dollar on it.

Our government is probably comfortable that a recession is coming so early in the term in office. If there is anything governments shudder at is having a recession towards the end of their mandate.

President Clinton had coined the term ‘It’s the economy, stupid’ to explain that the state of the economy is the single most important factor which influences the electorate’s judgement when voting out incumbent governments and voting in alternates that carry no guilt, being out of office, for the economic woes that afflict society at election time.

Many would argue that the US financial turmoil, which spread internationally especially after the Lehman Brothers bankruptcy, has damaged John McCain’s bid for US presidency in spite of his unveiled efforts to disassociate himself from fellow republican outgoing President Bush’s economic management.

Gonzi’s government should therefore see a lot of political mileage in facing an international recession so soon after being re-elected. Most governments spend like there is no tomorrow in the run up to an election and then slap on the brakes in the first half of a legislature. That is exactly what the government has done in the first eight months of this year where budgetary figures show a substantial under performance compared to the same period last year, let alone to this year’s expectations.

The onset of an international recession offers the government a formidable cover to make up for pre-election excesses without appearing mean and arrogant. Bombarded as they are with daily news about financial turmoil and international recession, people will have difficulty to distinguish between measures resulting directly from international factors and other measures resulting from purely domestic causes of over-spending to get re-elected by creating a false sense of feel good factor which now needs to be reversed to get back to reality.

Furthermore, if one has to face a recession, and these unavoidably happen once every economic cycle, it is politically convenient to face it in the first half of a legislature. This augurs substantial brightening up of the international economic environment in the second half as the world emerges from recession. It could permit government to face next general election at the top of the economic cycle.

This could sound hypothetical. There is nothing hypothetical, however, about the certainty of a general election by 2013 and the likelihood that the world will start emerging from the recession somewhere in 2010 to reach an economic peak of the cycle some two years later. The Gonzi government could well see the recession as a disguised blessing for its political fortunes if not for the country’s needs.

It has to be careful is not to push its luck too far too fast. The temptation to apply all the medicine early on the legislature and cover the cure for home grown illnesses with the restructuring needed to withstand the threats from an international recession, is politically attractive. It could well be economically deadly.

This is nowhere more apparent than in the revision of the restructuring of utility bills. The government is abolishing instantly subsidies that it had sustained for more than is prudent. Good economic management would have suggested that these subsidies should have been phased out long ago when the international economic environment was much more permissive. But that was politically inconvenient.

The government’s own figures show that government kept the surcharge frozen at 50 per cent between October 2007 and June 2008, leaving a few months cushion on either side of the March general election, even though the government was fully aware that mere cost recovery would have demanded a doubling of the surcharge.

Suddenly the government has converted to conventional economic wisdom and seems bent on not only stopping inbuilt subsidies but also to enforce recovery of past and future investment in infrastructure for the generation and distribution of water and electricity. The concession to phase out the capping applicable to major industrial users is being financed by overcharging other segments so that the whole cap subsidy in the phase out period remains revenue neutral for government. GRTU protestations in this regard are understandable.

This probably makes us the only country in the world that is raising energy prices at a time when energy commodity prices are coming down at astonishingly crushing pace. While internationally, governments are falling over themselves to prop up their faltering economies, ours proposes to add burdens on our fragile outfit. The slogan “we are all Keynesians now” has one exception and it is not the United States as conventional wisdom would suggest. On the contrary, the United States has thrown all budgetary caution (in any case there was little of it left under the “guns and butter” Bush administration) to the wind and is voting massive public investment to shore up its financial system and ailing industrial outfits which have been hurt by the credit squeeze.

Our government is an exception to the Keynesian trend. It seems to think that adding internally generated shock to exogenous tremors will give it political mileage down the road even if in the process it risks causing structural damage to the economy.

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