INTERVIEW | Wednesday, 13 February 2008

Sustainability questioned

Alternattiva Demokratika spokesperson for financial affairs Edward Fenech finds issue with the way other political parties are putting forward proposals. Dubbing their promises “unsustainable” and “irrational”, he puts greener proposals on the table. Here he talks to DAVID DARMANIN

At the time of interview, Edward Fenech had just finished addressing a press conference in which he revealed that proposals on income tax put forward by the Nationalist Party may, according to his calculations, cost over €75 million more than the €46.5 million stated by Parliamentary Secretary Tonio Fenech.
If the current government is re-elected, PN promises, those falling under the 35 per cent income tax bracket will start paying 25 percent tax up to a total declared income of €60,000. “It baffles me to see that in spite of all the internal economic expertise, PN failed to cost in the increased earnings that company owners will declare on their wages to save up that extra 10 percent tax on company profit,” Edward Fenech said during the press conference.
Still on this verve, Fenech cut straight to the chase, answering the first question before it was asked. “What needs to be addressed is a reform in corporate tax, not personal income.”
“In a coalition government,” he said, “AD will push for a reduction of corporate tax rate to 30 per cent from the current 35 per cent. The rationale behind this follows the example of some other European countries, who although perceived as highly taxed countries, their corporate tax rates top 33 percent in Germany’s case, 30 percent in the UK, 31 percent in France and to mention even better examples – in Cyprus companies pay 10 percent company tax and in Thailand 12.5 percent. We felt the need to address this issue so that Maltese companies do not remain at a competitive disadvantage from their counterparts in the EU.”
AD is estimating that this measure will cost the country €22 million, recoverable from stricter tax compliance, a gradual implementation and a potentially controversial proposal advocating the possibility of increasing corporate tax in banking to 40 percent from the original 35 percent.
“We are honest enough to admit that Malta still has a rampant level of tax evasion. The Tax Compliance Unit should be more targeted to ensure that exaggerations in tax calculations are no longer tolerated. It is no longer acceptable that people live the lives of millionaires and declare the earnings equivalent to what they pay their employees. The government knows who drives the expensive cars and who buys expensive homes. Some (tax evaders) will even have the cheek to rake in on social services,” he said.
Reminiscent of a tactic used by Tony Blair between 1997 and 2001, Fenech explained that if need be, we could either reduce tax rates by one percent every year, or reduce it in two chunks over a five-year span. “Since we may have a global recession coming along, it might make sense to adopt this system rather than affecting an immediate tax cut.
“The government may also make up for this burden by, if need be, increasing corporate taxes for banks. I’m saying this not because AD is prejudiced against banks but only for the simple reason that over 90 percent of banking in Malta is effectively a duopoly. We never thought that is it economically just to tax poor companies at the same rate. The two companies sharing the very lucrative local market of banking should carry a heavier burden of the country’s tax economy.”

But wouldn’t such a tax increase act as a disincentive for potential newcomers to the local bank industry? Wouldn’t this choke the hope for healthier competition in the banking sector? And what about the smaller banks in Malta? Wouldn’t they stand to suffer from a further competitive disadvantage if taxed at 40 percent?
“The reasoning behind this proposed increase addresses the unfairness of a duopoly status. Once there are multiple players in the market, this reasoning would no longer be applicable. Of course, this proposal is suggested as one of the possible measures to address unfair competition, and smaller banks should not suffer from such a development. In other European countries, companies that enjoy such a big market share as our two major banks will undergo an investigation to conclude whether this exaggerated profitability is sufficiently justified in terms of fairness,” he answered.
In the local political scene, such reasoning will certainly open new doors, inevitably giving way to a barrage of questions to justify the ripple effect similar decisions may have on the industry at large. How does the Green Party, for example, justify taxing a particular sector and not another without being discriminatory?
Would AD, in a coalition government address other local situations of oligopoly – such as in telecommunications, TV service providers or the effective postal service monopoly? If so, are any repercussions on price increase envisaged in order to make up for increments in tax rates?
“The issue is not with any sector in particular, but with the nature of competition in banking. If a particular sector is dominated by a few players who don’t face strict competition, then the tax system has to reflect such,” he explained. “The beverage industry for example, has massive competition with importation, and should for this reason, enjoy the 30 percent rate. Competition in other sectors works well - notwithstanding the fact that there may be oligopolies, and this is reflected in their prices. In banking the duopoly doesn’t seem to work in terms of competition. As to possible repercussions on incremented charges making up for increased taxation, it is the job of the MFSA to ensure that that does not happen.”
In its campaigns over the past years, AD has repeatedly used “sustainability” as a campaign buzz word. How does AD intertwine its economic vision to its core green policy?
“We insist on sustainability in every economic decision made,” he answered, seemingly prepared for the question. “This is key to a country of the size and density of Malta, as we often suffer tremendous environmental impact on certain economic decisions taken. We insist on the introduction of sustainability tests for economic decisions, in the same way environmental impact assessments are carried out for development and construction.”
In this campaign, AD seems to be more proactive in concretely providing remedies and alternatives rather than being just critical. Yet, as any politician with differing ideologies would, Fenech was happy to offer a fair share of criticism when asked to analyse opposing parties.
On economic attitudes, Fenech welcomed the idea of tax revisions since “everybody, including myself, enjoys having more money to spend and more economic freedom.” There is an obvious “but” that follows.
“This country has gone through a number of bad examples of fiscal mismanagement from both parties in government. Time after time, we have been promised that the fiscal situation was stable, when in fact it wasn’t and it still isn’t. There is a level at which, running budget at a deficit will end up causing a crisis led by an inevitable increase in bank interest rates to sustain government spending. If there is a silver lining to this country’s economic instability is that the Maltese have appreciated the importance of having a position for the government to reign in on our fiscal deficit, even at the cost of it causing short to medium term pain. And yet, the government still falls into the temptation of applying short-term economics. We have seen this in the enthusiasm this administration flaunted in building high rises. The next high rise project may employ 500 people or so for the next months. AD refuses to look at economy this way, as we insist on costing in the long-term benefits of economy. Smart City is perhaps a good example, why not?”
This is a first, coming from AD’s spokesperson for finance. Asked to elaborate on Smart City, Fenech qualified his statement saying that the IT market is suited for Malta because it doesn’t require economies of scale and economies of scope.
“An enormous IT business can be built in a back office,” he explained. “Perhaps the best example is to look at is Yahoo - a small company that is now worth a staggering $45 billion. We need to focus on value added service that fits into our country’s physical limitations.”
In a typically green manner, Fenech remains very critical of economies that are very dependent on construction since, he says, there are “massive implications on the quality of life of people and on the increasing traffic situation in Malta. We cannot be continuously driven down this line, where both government and the opposition seem to be acclimatised to the fact that Malta is going to be a permanent building site. This country always assumed that Malta is very dependent on the construction industry. Statistics will show you that the building industry contributes to less than five percent of the economy. One of the banks alone produces more GDP than all the construction industry put together. If Malta is used as an international financial services hub we can produce the same amount of economic wealth without having to butcher and rape our countryside, thus making life in Malta a little more bearable.”
What about the MLP’s proposal not to tax overtime?
“My initial reaction to Labour’s proposals on overtime is that it has been put forward from the heart. Why should we tax those who dedicate more than 40 hours per week? Why shouldn’t we give them a leg-up and de-tax their overtime? The answer is simple. We need to look at all the realities involved. This proposal for starters, is not very original. Ironically, centre-rightist Sarkozy proposed the same exact idea in France nine months ago, and nothing has come out of it so far. The logistics of putting this proposal into action are very serious, if not impossible. It would have been more credible, and cleverer, if the MLP proposed de-taxing overtime once the total amount does not exceed more than 10 or 15 percent of the pay packet. Pigheadedly, Labour keeps insisting on de-taxing overtime completely. AD has always been open to proposals coming from other political parties. That said, such proposals need to be considered more seriously before made public.”
Asked whether he sees Azzjoni Nazzjonali (AN) as a threat, especially when taking into account that its leading representatives are strongly associated to the business community, Fenech explained why he feels that the future does not look very bright for the new rightist party.
“I’m always reluctant to do politics and target just one section of this society. AN’s call is that business people are suffering and that they need a leg-up. I understand that businesses have their own sufferings and tribulations, but every political party must look at the country as a whole and not work in the interest of just one section. Obviously, people in business complain and Malta still has a serious problem with useless bureaucracy. The government creates burdens in the private sector that will ultimately create no benefit. These are realities that must be looked into, but building a portfolio that targets just one section of society is not sustainable. AN’s proposal on the introduction of a flat rate tax is interesting, but in economic terms - how much are we talking about? How much will this cost? Everybody can put forward proposals, but when we do we must ensure that they are seriously backed-up, well-costed, rational and obviously decided upon by a democratic mandate within the party.”