INTERVIEW | Wednesday, 05 March 2008

No more VAT please, we’re Maltese

Parliamentary Secretary in the Finance Ministry Tonio Fenech spoke to Charlot Zahra about the Nationalist Party’s electoral programme and Malta’s economic situation, among other things

In its assessment of Malta’s Medium-Term budgetary objectives, the European Commission said there were “risks to the achievement of the 2010 budgetary targets, in particular due to the reliance of volatile tax revenue items in 2008; the recent decision to subsidise energy prices without compensating measures; the macroeconomic outlook after 2008 and the lack of information about the underlying measures, especially as regards the envisaged continued restraint in the public wage bill.”. Is the Nationalist Government still confident of reaching a budget surplus of 0.9 % of GDP in less than three years’ time or not? Why?
The government is very confident of reaching that target. I am not surprised with the assessments that the European Commission made. If one reads the previous assessments, they always say that we are at a medium risk. Neither did they say that we fared more badly nor did they say that we fared better in the their projections. Our track record is that we have always reached our set projections. If this was not the case, we would not have joined the eurozone.
However when the Commission makes its assessment on its own forecasts, called the Medium Term Objectives, that whether you are going to reach your targets that you have set in the Stability and Growth pact and our convergence programme, they highlight a number of risks. Obviously it is their job to do so because obviously they would have to put the government on his guard and not slacken down; to remain on the right track. That is the primary message.
Obviously the Commission always expresses more preoccupation when the Government reduces taxes as the easiest way to reduce the country’s deficit is to impose taxes. However the Government’s experience with the reform of the income tax bands in the past three years was that the government’s revenue increased as a result.
The economy grew by 4% in 2007, and the indications are that despite the fact that there is an ongoing election – which generally slows down the economy – this year there isn’t an economic slowdown solely because of the fact that there is an ongoing electoral campaign.
The first indications of Government revenue for January this year are very positive. In fact the Government has reached its targets and even surpassed them in certain areas. Therefore we are confident that we will reach the targets we set for in this year’s budget will be reached as well, leading eventually to the attainment of a budget surplus by 2010.
This is a promise that the Nationalist Party is making in its electoral manifesto. Only the PN is making such a pledge. Unfortunately, the Opposition leader is saying that this is not a priority for him, therefore he is sending the wrong message, in my view, to the economic operators and whoever wants to invest in Malta.

The major banks taken together have registered a total profit of €216.5million during the last financial year (BOV: €101.8m, HSBC: €114.7m). Does the Government believe that the time is ripe for a windfall tax on banks’ profits?
The government does not believe in this type of taxation on an economic level. While it is a huge temptation that when you see certain economic sectors that are doing certain profits, then the Government should wake up one day take a slice of that pie. This would send the wrong message abroad, especially to the financial services sector, which we are targeting for further growth from the 6,000 to 7,000 jobs there are presently to 10,000 jobs by 2015.
We are forecasting a growth in the contribution of this sector to the Maltese economy from 12% to 25%. When you start playing cowboy with the sectors which are growing by imposing further taxation on those sectors that are growing, the message would be for them to leave Malta. The fact that they making more profits also means that Government is earning more revenue as well since we take 35% of all the profits that they make.

Do you exclude increasing corporate tax, as AD is proposing?
I exclude it; it is not in the Government’s plans. We want more banks to open in Malta, and if we go for a tax rate of 40% we would be discouraging them away from coming to Malta. Hence what AD is proposing does not make economic sense and goes against our vision of growing the financial sector.

In the 2008 Budget, the Government estimated a GDP growth rate of 4% for this year. Aren’t your growth projections too optimistic when the EU Commission and the IMF have reduced their growth forecasts for 2008 in view of a global slowdown?
That’s why we took the measures that we took in the 2008 Budget to stimulate the economy. We had predicted what was coming; we weren’t caught by surprise. When we made our growth projections, people were already speaking on the possibility of pressures on the global economy, both in terms of energy prices, the price of food as well as the financial turmoil.
Therefore we took additional measures in the 2008 Budget to continue stimulate economic growth and sustain the growth rates. As to whether we have been over-optimistic or not, I tend to be conservative in my estimates.
The criticism that I got when we presented Malta’s first convergence programme, was that Government was projecting only a growth rate of 1 to 1.5%, then progressing to 2% growth rates over the first two years.
The question people asked me at that time was: If we project a higher growth rate, wouldn’t the deficit problem be resolved more quickly? But the economy generally does not respond so quickly to these measures, it takes more time to grow or to contract in response, although in case of a global shock the economy can contract immediately. We are still using the same assumptions today – we are not being over-optimistic or under-optimistic in our assumptions.

The Nationalist Party is proposing an increase of the ceilings for income tax at 15% and 25%, while the ceiling for the 35% tax rate will be increased to €60,000. Is the Nationalist Party pandering to the upper middle class through this measure or not?
Our objective in not to favour a class over another but to give an impetus to the economy. If the economy grows, and who creates the economy? The economy is created by people who invest and people who participate in the workforce and give their contribution. They are two sides of the same coin – if you help the self-employed and companies and investors, at the same time you are helping employees. If a person already does not pay any tax at present, I want to incentivate him or her to work more, therefore we are proposing to widen the tax bands so that he will not pay any tax on that additional work or else pay at a low 15% rate. The effort of the lower middle class is already not being taxed aggressively, as the first Lm5,000 are tax-free and the remaining Lm3,000 are taxed at 15%.When we say that we want to create 25,000 new jobs in the next five years, who will create them? Self-employed people and small companies, which constitute 95% of the country’s economic activity If these people employ one more person, this will give us the number we need as an economy to continue growing. You cannot separate ‘us’ from ‘them’; we are on the same boat. If the economy fares badly, the investor will suffer as well as employees who will not be able to find a job.

In its electoral manifesto, the PN is saying that in two years’ time, the Government will earn more revenue than it is earning at present as a result of the widening of the income tax bands. Can you state how revenue will the government be earning more as a result of this pledge? On which basis are you making these calculations?
We act cautiously and progressively. When we reduced the Income Tax rate from 65% to 35% some years ago, Government revenue from Income Tax increased by 11%. When in 1995 there was another Income Tax reform and a change in Children’s Allowance, Government’s revenue from Income Tax increased by 10%. When we introduced another reduction in the Income bands in 2007, were projecting a growth in revenue of Lm7 million. However the economy grew so much that revenue actually grew by Lm30 million. We had more bullish projections, but we were cautious – as even the EU would had questioned over-optimistic projections -- and went for Lm7 million, enough for us to reach the projected targets for 2007. In fact we have exceeded our targets also in this respect. I still believe there is more room to go in this respect, as every will tell you that high income tax rates discourage economic activity and discourage the effort to do more. Lower rates encourage you to do more, and in the case of Malta, declare more. That’s why we’re being cautious this time, even in view of the 2010 targets, and we are targeting that we will recover it within two years rather than in one year as we did in the past.

Another pledge in the PN electoral manifesto is the removal of the €23 departure tax completely after it was reduced two years ago. Is this tax being removed following pressure from the EU or not?
Everybody knows that the European Commission has opened infringement proceedings against Malta on this type of tax. However I have to say that the remaining part of this tax was not introduced by the Nationalist Party but by Opposition leader Alfred Sant when he was in government between 1996 and 1998. We removed our part of the tax after two years of introducing it. In the first budget that the Gonzi administration presented in 2004, we had the aim of getting the country’s finances on sustainable foundations, this was one of the taxes that we introduced. After reaching our financial aims for the country, we felt that we should not keep this tax and we reduced from Lm20 to Lm10. The remaining part is not ours. What the European Union is actually saying is not to remove the tax itself but to remove the element of discrimination that it has. Therefore the option is either to tax all passengers coming in and out of the country, irrespective of nationality, or remove it outright. There were people who suggested that we should reduce the tax but impose it on all incoming and departing passengers, therefore collect the same amount of money, or remove it completely. The Government never wanted to introduce this tax on tourism because it is a very important sector of the Maltese economy and the Government believes that it should not be taxed…

How much will the Government be earning less as a result of the removal of this tax?
Practically Lm2-2.5 million (around €5 million) a year.

Labour leader Alfred Sant is pledging that a new Labour Government would re-negotiate with the EU the restructuring plan agreed with EU when this expires at the end of this year, keeping the Malta Shipyards open? Is the Nationalist Party ready to make a similar pledge or not? Why?
First of all, in the negotiations that we made with the EU, we inserted a clause which permits the government to discuss the restructing of the Shipyards so that if thinks do not go on as planned. However it is good to note that that in the past seven years, we have reached all our objectives in the first five years. Unfortunately, in the last two years, the level of productivity has fallen and therefore we could not keep up with this agreement made with the EU. Discussions are constantly ongoing with the EU Commission, therefore Sant is not saying anything new. The government has already started working to have viable Shipyards. We do not want that the shipyards continue siphoning off taxpayers’ money to continue sustaining the yards as if the country’s finances were a bottomless pit. This has never been the credo of the Nationalist Party.
We have tried to enter into innovative areas. If you see the Government’s plan for the Grand Harbour, the idea is to use one of the quays for cruise-liner business. The Shipyards would have benefited from this. Unfortunately the General Workers’ Union objected to this. The Government has already started negotiating with a huge international company which works in the Shipyards business to forge a partnership in order to introduced new work practices, expertise and investment, as well as new orders, to get the Shipyards viable again. The GWU ordered industrial actions because the Government is discussing. But does this make sense in this country? Can we continue making a pre-electoral ball game out of the Shipyards?

But if the Shipyards continue making losses at the end of this year, will the Government ask the Commission to extend the restructuring plan?
…But only if the restructuring makes sense. Yes, the Government will continue working to get the Shipyards back to financial viability. We will discuss with the EU how we will get the Shipyards back to financial viability. For the Shipyards to become viable, everybody must cooperate, even the GWU. We cannot have a situation where the GWU objects to every proposal to make the Shipyards viable and give the workers’ peace of mind that they will have a productive job, not siphoning off money off the people’s backs. If everybody cooperates, then the Government will be more than ready to face the European Commission and discuss the matter.

Therefore you do not exclude closing the Malta Shipyards?
That’s an assessment that you are doing. I am confident that we will manage. Under a Nationalist Government we have managed to do restructuring in other places, even when the GWU took doubtful positions as it is taking now. I hope that when we are in Government and the electoral tension subsides, and the will to please a party not another will pass, then the GWU will start speaking and looking at things with sense like the Government is doing. I am confident that this will happen.

A Cabinet Minister had once said that the manufacturing industry has no future in Malta. Do you agree with this assessment or not? What concrete measures is the Nationalist Party’s proposing for the manufacturing sector?
What I recall being said is that the textile manufacturing sector has not future in Malta, and world economic realities have proven this prediction. . This has not happened with the pleasure of the Government. I know how the Prime Minister was very preoccupied when he learnt that VF and Denim were closing down and dismiss 900 workers. We are the Government that created jobs, and we tried to create jobs, but one cannot render a country competitive in those sectors in which it cannot be competitive. Nobody wants to accept jobs at a reduced rate. However it is irresponsible that somebody is now proposing to give back holidays falling on a weekend because it has not affected productivity. From where did the 4% growth rate of the economy come? Investors look at productive days available, low tax rates, human resources available and the infrastructure. How do you think we managed to attract the pharmaceutical companies, and other companies like De La Rue – which should have closed before the last general elections – and Dedicated Micros expanded their operations in Malta. Why did they invest in Malta? They look at your tax structure. It is laughable that the Labour Party is proposing to make manufacture non-taxable. Today, with the tax relief that we give, they are already practically non-taxable. Moreover, we already give rent at a discounted price through MIP. The Government in its electoral programme already allocating €30 million to build new 26,000 square metres of new factories. Moreover, it will invest more than 45 million euros in training and incentives for the promotion of industry in Malta. In addition, the PN is pledging to expand the Business Incubation Centre and give more incentives to attract new films to Malta. We are also pledging to spend 28 million euros to upgrade existing industrial parks.

Will the Nationalist Party keep VAT at the present rate of 18% for the next five years or not? Why?
I believe that our electoral programme is clear. Not only we are not proposing to increase VAT, but we are saying that there are a number of areas where we want to negotiate with the EU lower tax rates. While the standard tax rate at 18% and the lower rate at 5% are at the discretion of each EU Member State (although the standard rate cannot be less than 15%). However a Member State cannot decide the items that can be introduced under the lower rate on its own. It has to be permitted either through under the Treaty which regulates VAT legislation in the EU or through a special exemption. Currently there is an EU-wide discussion which is looking at the various reduced rates that different Member States have obtained through the years to create a more uniform scenario. The Government is insisting that on food and medicine the present rate of 0% should be maintained. This should have ended by the end of 2010, however it has already been extended to 2011. In these discussions, Malta is insisting that the derogation should be kept permanently and we will not accept that it is not if there is at least one Member State which still has such an exemption. On other things, such as restaurant services and other sectors, Malta is asking to reduce the VAT rate to 5%. Therefore in our electoral programme we are speaking of areas where we want to reduce VAT rather than increasing it. We do not have any intention of raising it. It is one of those things that the Opposition always claims that the Government intends to do without telling us what its plans are. Maybe the Labour Party has the intention to raise VAT rates itself?

The Labour Party is pledging that it will reduce the electricity surcharge for small and medium enterprises besides residences. Will the Nationalist Party alleviate the surcharge burden of small and medium enterprises, as it is currently doing with large industries or not? Can you kindly elaborate more how?
First of all, it is clear that the Labour Party proposal is a gimmick and a joke on the self-employed which before 1996 had already experienced Alfred Sant’s promise that he would have removed VAT and the cash registers to give them a breath of fresh air.
I still meet businessmen of Labour persuasion who tell you that since then, they have not voted Labour anymore because the effect of that decision was the introduction of a new tax and their business went down.
On the other hand, with the Nationalist Party’s income tax proposal to widen the income tax bands, all self-employed and small and medium enterprises in Malta will have their tax bill reduced by between €2,000 to €4,000. Our proposal incentivises you to work, invest more to make more money, thus leading to an economic growth which will be enjoyed by everybody.
On the other hand, the Labour party proposal incentivizes you only to be wasteful and lazy, because you only take money from the Government if you consume energy.

Will the Nationalist Party in Government privatise the entities that are still majority-owned by the Government, such as Air Malta, Enemalta, and WSC or not?
It has always been the PN’s belief that the Government should not be an operator but should only be a regulator in those areas in which it should not operate. Government is not there to do business. However, you have mentioned sectors that while in other countries are normal business areas – However in small country like Malta, where there is not enough critical mass to make that kind of investment and continue upgrading it because returns are not necessarily sufficient, the Government must play the game itself. Therefore the Government does not have any plans to privatize neither WSC, nor Enemalta. The same thing applies for AirMalta, which has a strategic role because if it ended up a purely commercial airline without any influence from the Government, it would sustain only those routes which are sustainable financially. This would mean that for us, a small country in the periphery of Europe, that the vital air links needed to sustain tourism as well as industry would be severed. Therefore the Government does not have any plans to privatize these entities because they are essential for Malta’s strategic interests.

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