13 December 2006

The Web
Business Today

George M. Mangion

Can we augur that the feeling for the coming festive season will be jolly and stress-free?

The long suffering middle classes can sigh at the relief when counting their improved take-home pay with the Lm12m cut in direct taxes for next year. The season many expect to be plentiful has welcomed the revised income tax bands. After heightened pressure from the media commenting on the pre-budget document, government has launched a scheme to encourage private property owners to rent their property to the Housing Authority. The scheme caters for landlords to rent for medium to long-term periods of not less than 10 years in return for receiving a reduced tax rate of 5% on such rental income.
Another innovative idea was the tax rebate of Lm400, deductible in respect of fees paid for licensed childcare services. Business also benefits from this new incentive, as all the expenses related to childcare services will be deductible as an expense. Married persons opting for a separate computation will benefit by up to Lm155 per annum, whilst that for married couples opting for a joint computation tax will be reduced by up to Lm242.50. An improved tax credit will be granted for parents of children who attend approved private schools.
This Christmas will also warm the pockets of SMEs. For the umpteenth time critics had asked government to support the self-employed. Now, one gladly welcomes the reform in social security contributions that permit such contributions to qualify as a tax deduction for the business. At last this Christmas all self-employed will hope to partake from all the social benefits and be entitled to a pension upon payment of appropriate contributions.
Such workers are being given a no-questions–asked fiscal support which they deserve. For a start, individuals working with family-owned businesses will be able to register as employees of these businesses for tax purposes. In the past their social security contributions were disallowed but now they will be tax deductible.
Amendments were announced in the 2007 budget to reduce social security contributions payable by part-timers and host families. The glow of Christmas presence can be gleaned from favourable economic indicators pointing to a renaissance of a domestic and an export-led rally. Our lira, pegged to the euro, has gained value while international oil prices are reducing moderately this winter and the dollar continues to plummet.
Local politicians, while arguing on most fronts, yet act in unison to laud the efforts to meet the convergence criteria in order to convert our currency to euro. A recent NECC conference which was targeting an audience from the top echelons of the commercial, administration and economic sectors, was informed that the euro tightens the reins on otherwise profligate governments.
For many years we continued to tax, spend and borrowed until our debts ballooned to over 76% of GDP. Nobody bothered to restrain our mounting debt mountain given that our annual debt servicing costs now exceed our health budget. It is an enigma how politicians, in their zeal to accommodate the militant unions, have succumbed to pressure and negotiated industrial peace at the expense of sacrificing road infrastructure and a shabby environment. Nobody squealed while we unceremoniously polluted our beaches with untreated sewage. Farms also polluted the aquifer with untreated sewage and animal dung.
Now the penny has dropped. As newly admitted EU members we were given funds and a window of three years to install the sewage treatment plants. These will be put on tender next year.
Again, we lumber along with a bloated public service and loss-making entities such as Air Malta, Enemalta and last but not least the Drydocks. Improvements and restructuring efforts were touted during the Budget Speech by the Prime Minister and Minister of Finance. In his perception, new FDI is coming soon. In view of rising fuel prices, government had already anticipated a proportional wage increase. By comparison, our minimum wage at Lm60 per week is already one-and-a-half times higher than the average wage for the ex-communist countries that joined the EU club. Notwithstanding that our wages are not cheap.
It is true that new foreign investment has substantially improved and the financial services sector has performed well. This is a quiet revolution that needed no trumpet blowing. With 18 banking institutions and more than 150 investment funds we have slowly started reaping the good tidings of a stable economy. Without a shadow of a doubt the smooth negotiation with the EU approving the full tax imputation system has quickly percolated in the right circles and spread the glowing news among investors. More positive aspects of the economic performance result from the reduced deficit of Lm55m, linked with generous tax cuts. Nobody can denigrate the modest growth in the first six months of 2006 with GDP growth reaching 2.6%, compared to negative rates in the past years. The mentality about structural deficits is slowly changing, fostering a desire to hit surpluses in the near future. Party apologists blame our relative sluggish performance compared to ex-Communist countries which register constant 7% growths due to increases in oil prices.
But in truth to combat inflation, which reaches double the European average, we lack enforcing consumers’ rights and fail to empower them in getting value for their money. It is true that the long and agonising port reform had been putting up our hopes for a 25% drop in port handling but so far this is still a myth. More is expected from the much-hyped agreement with the importers of medicines to cut down prices of medicines.
Yet, not everything is doom and gloom. The connections project for Valletta has suddenly resuscitated while the long planned ‘park & ride’ is finding popular approval by commuters. Although the Smart City project is not yet formalised, strong signals point to a healthy and sustainable influx of jobs should the Lm100 investment succeed. This consists in the construction of a residential ICT city located in the best scenic part of the harbour area. In the past decade, Malta lacked mega deals of this size. These found welcome shelter in such competing places like Wales, Scotland and Dublin. Projections by members of GRTU over the Christmas period show that consumer confidence is healthy and is expected to yield a good turnover although the buying spree may be delayed for the final days before Christmas. The omens for the jobs look favourable while orders for capital goods may drop as the major equipment for Mater Dei hospital has already been in place for next July grand opening. Nobody can ignore the possibility of a late rally for luxury items. Just consider that a massive hoard of hitherto undeclared funds will be looking for a shelter in anticipation of the euro conversion.
With the bonanza of over Lm250m in circulation mostly in Lm20 notes, all this hoard of notes is frantically waiting to leave its hideaway in locked treasure chests. Some are proverbially tucked away in mattresses. Apart from frenetic sales of high-class jewels, antiques, and luxury cars, one expects sales of designer style apartments to be in hot pursuit of such undeclared moneys. Thus the approaching festive season looks promising and consumers may look forward to a bonanza of last minute shopping thus keeping the cash tills ringing for the last time before the introduction of the ubiquitous shining new euro coins.

The writer is a partner in PKF Malta, an audit and business advisory firm.

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