BUDGET 2003 REACTIONS

Leo Brincat says Government has not and will not reach deficit-reduction targets

By Matthew Vella

Leo Brincat has remained sceptical about Government’s progress in their bid to reduce the deficit by the standards they had initially set out for themselves in 1998. Speaking to The Malta Financial and Business Times, the Malta Labour Party’s Finance spokesperson said Government’s inability so far to treat the deficit problem had shown that these targets would not be reached neither in 2003.

"The main thrust of this budget was economic growth, but there was nothing concrete with regards to the growth of industry, tourism and the self-employed.

"What incentives were mentioned within the proposals were really just rolled over from last year’s budget. Tourism itself has not been given any form of boost since nothing has actually changed. With regards to industry, the main focus was the creation of Malta Enterprise, which the Malta Labour Party has serious misgivings about."

Mr Brincat said that as far as the economy was concerned, this budget would not be kick-starting the economy back in action.

Mr Brincat also said Government’s progress in terms of the economy had inevitably been in doubt by the administration itself, saying the Finance Ministry had forewarned the social partners and other entities on Malta’s future economic progress.

"It is written in black and white – in the pre-budget consultation document, the government said economic growth was expected to be lower in 2003 than it was in 2002."

Not many were those who complained against the budget as whole, which had a wide range of socially-beneficial measures for lower earners, not least with the revision of the income-tax bands.

However, many said the budget lacked vision and did not address real issues or take drastic measures. In a lengthy critical assessment of the budget, the GRTU was extremely critical of the Minister’s inability to address the drastic need for cuts in public spending and debt-servicing. The GRTU spoke at length about having to increase tourism levels by the removal of airport and government taxes that served to make the country less competitive in the post-9/11 world of slashed prices.

Alternattiva Demokratika said the budget did not reach far out to address the real problems the country faced, but welcomed the environmental measures taken and the new social measures.

Malta Employers’ Association

The MEA said the budget was positive and a reflection of the current domestic economic and social situation. The previous, rather austere budgets managed to reduce the fiscal deficit to 4.6% of GDP, and whilst the economic situation is still not rosy, MEA said Government put forward a budget that focuses on a more expansionary fiscal policy through moderate tax cuts and fiscal incentives.

"The budget contains measures that will benefit both consumers and the business community. The revised income tax bands are a modest relief to middle- income earners. More families will benefit from the supplementary allowance because of the revised eligibility income brackets."

MEA also said that the extension of the 30-day VAT refund scheme for enterprises employing up to five persons with a turnover of up to LM250,000 (previously LM100,000) is a step to alleviate liquidity problems in small enterprises.

"The tax system for farmers also offers substantial benefits to the farming community. The allowance for research and development is important to foster a culture of innovation that is needed for our industry to face the challenges ahead.

"The new collective agreement for the public sector has implemented an important practice in that the collective agreement increases are inclusive of the cost of living increases. This is an important measure that is needed to minimise pressures on national finances resulting from increases in labour costs in the public sector, as happened previously."

MEA however said that the impact of an increase in labour costs by LM1.75 per week, plus social security contributions might have an adverse effect on firms who are finding it increasingly difficult to compete in international markets.

MEA said it was satisfied that the budget increased the allocation of funds to the MCAST and the introduction of incentives to families making use of licensed child care centres, describing it as a step towards improving the female participation rate in Malta.

MEA also said that the proposal for a new Retail Price Index for pensioners will benefit an important segment of Maltese society.

"Taken within the context of the challenges facing the country and in view of the difficult international economic climate, the budget certainly proposes an optimistic vision for Malta’s future. This needs to be supplemented with a strategy that addresses issues that will affect the country in the medium to long term.

"One such issue is attracting sufficient foreign investment to generate the economic growth that is necessary to continue to improve the national finances without resorting to tax increases. Another is social welfare reform, since it is accepted that the current system is not sustainable and requires modification to respond to the country’s changing demographics."

Chamber of Commerce

The Chamber of Commerce said that Government’s fiscal strategy as laid out in Budget 2003 was a positive step in addressing the need to balance out Government’s finances, its tax revenue, sales of assets and loans. The budget addressed the need for a lighter burden in term of the procedures for the payments of tax, which benefits business.

The Chamber of Commerce said it welcomed the Finance Ministry’s will to control public spending but was wary about the increase in social benefits.

"The impact of these measures upon the Maltese economy depends on many diverse factors amongst which is family consumption, and the restructuring of the economy that requires new investment from both local and foreign sources, as well as the progress of the international economy.

"One must therefore see the effects of the se factors in detail before making further comments."

Alternattiva Demokratika

Dr Harry Vassallo, Chairperson of the Green Party said the budget was positive but lacked vision on vital issues.

"It’s a restrained electoral budget with several positive measures, some of which do not go far enough. The relief to middle-income earners through the revision of tax ceilings in part compensates for the losses sustained in previous years.

"Other positive measures include support to parents for child-care centres expenses, an increase in the number of low income earners who will benefit from supplementary assistance, the new system through which a specific cost of living increase will be allocated to pensioners and a greater investment in the Malta College for Arts, Science and Technology."

Dr. Vassallo welcomed the positive environmental measures such as the elimination of registration tax on electric cars as well as the elimination of duties on recycled and bleach free paper, but said that these measures are not sufficient for a sustainable environment.

"The budget lacks specific and concrete measures such as a clear commitment towards renewable and clean energy such as solar and wind energy and fails to implement any ‘polluter pays’ policy which are crucial for a successful waste management strategy."

The Green Party also welcomed the VAT refund system to promote the rehabilitation of properties in Cottonera and Valletta.

"However it is disappointing that no other fiscal incentives or disincentives have been introduced in this budget to promote the sustainable use of vacant properties all around Malta and Gozo."

Dr.Vassallo welcomed the fact that the budget included a few of the Green Party's ideas, saying this underlined the central role of Alternattiva Demokratika in Maltese politics.

General Retailers and Traders Union

The GRTU said its main criteria for this budget had been the creation of opportunities to create a more competitive economy within the international market, and the creation of incentives for more flexibility with regards to work.

"These last budgets have been dominated by the problem of solving the structural deficit, having first been accumulated by governments who preferred borrowing money without guaranteeing enough revenue to service the debts incurred.

"The deficit can only be beaten with a real economic growth of more than 4 per cent a year. Only an increase in national wealth can allow Government to make good for its increasing public expenditure."

The GRTU said the Finance Minister was not courageous in taking drastic measures to cut public expenditure, or foster investment within the private sector by reducing taxation and removing extra regulations which burden entrepreneurs.

The GRTU said Government had done nothing to alleviate entrepreneurs’ tax burdens and thus aid Malta’s competitiveness as the country gets ready to face European competition, with businesses with lower cost structures.

"As regards VAT, it is good to see Government trying to make up for its initial bungles when it first introduced VAT, having penalised harshly those who did not manage to pay their dues when they could have been easily forgiven. Government is now trying to address this problem, and is also reforming VAT, income tax and National Insurance.

"GRTU is still trying to assess correctly what has been set out in this budget, so that what happened last year, where words mean one thing and facts point to another, does not happen again.

"Minister Dalli has once again ignored the issue of improving cash-flows for businesses even in the case of VAT refunds, since this new proposal only affects those businesses employing up to five people, when statistics show that many entrepreneurs, especially young entrepreneurs, do not employ other workers. These are the ones who need most help.

"We are also seeing a situation where economic growth is at 2.5 per cent in real terms, makes it a happy change from last year’s drop of nearly 1 per cent. Government is however collecting taxes at a rate of 8.1 expenditure and this is expected to grow by 5.2 per cent.

"The economy cannot grow at such a slow rate with Government having to sustain such a large public expenditure as projected by the Finance Ministry. Taxation is increasing every year, and this is higher from the increase in cash generated from employment which is only 1.8 per cent, the increase in disposable income for households which is only 1.2 per cent, and the gross profits for businesses which is at 2 per cent."

Hospitality and Leisure division head Mr Philip Fenech said the budget had taken into consideration the reduction of bureaucratic practices and administrative costs for businesses, especially with the removal of VAT payment at customs and in the case of declaring one’s bad debts outside the Small Claims tribunal.

"Although the Minister said there will be an estimated increase in Lm11 million in circulating money after the income tax and cost of living adjustments, we must take into consideration that this depends on whether the money is kept in the economy."

Mr Fenech also praised the environmental measures that he said were very important for the tourism sector.

As regards tourism, Mr Fenech said he was pleased Government had invested extensively in marketing abroad and did not increase the 5 per cent VAT on tourist packages. However he had certain reservations with regards to tourism.

"Our economy needs more money and tourism is the easiest source to bring in new money. Last year we had more conference and incentive-travel packages, cruise-liner tourists and English language students. However we did not have as much mainstream middle-income tourists, and these are by far the largest contributors in tourism."

Mr Fenech said that following 9/11 many competing airlines lowered their flight prices and deducted airport taxes. He said this budget had done nothing to remove such constraints in Malta.

"Airmalta, despite its particular problems, increased its prices following 9/11. Although we are please to learn that Government managed to absorb the 9/11 after-effects, the hotelier cannot be expected to lower their prices and neither can Airmalta. Therefore Government should have deducted its tax on holiday packages as happened in other countries such as Tunisia, Turkey and Eygpt."

Mr Fenech said there were more challenges the budget did not address and that it did not seem that much new money would be generated for the economy at large. He said Government should have created reduced-tax incentives for tourists who spend more nights than the average number of nights usually spent by tourists in Malta.

"Preferably all taxes, VAT, airport and government should be removed so that Malta can become more competitive internationally, since tourism is very price-elastic. The money lost through the removal of taxes would be ultimately recouped by the increase in foreign exchange earnings and VAT on spending that an increased number of tourists will generate."

The Federation of Associations of Travel & Tourism Agents (FATTA)

"From a preliminary analysis of the measures announced in the speech, the success of the strategy depends on a number of factors including the economic situations on the international scene and sustained domestic consumption.

"FATTA would have liked to see measures aimed at stimulating investment in tourism marketing. During the past decade, considerable investment has been undertaken by the private sector in particular to improve the tourism product and plant. Such investment was encouraged and supported by government-induced incentives. However, in the sphere of marketing, we have not seen any particular measures towards stimulating private investment.

"On the contrary, public sector measures so far have served to drain funds from the private sector to the detriment of marketing.

"Now that the quality of the tourism product and plant has been raised towards the desired standard, it is high time for tourism marketing to be stimulated. Without increased investment in marketing, tourism product and plant will continue to be under-utilised and consequently the investment in such product and plant will not generate the desired returns.

"Increased investment in tourism marketing will also translate into higher domestic consumption and would therefore indirectly contribute to the government's fiscal strategy. FATTA augurs that government will not wait for another year and another budget before introducing incentives to stimulate rapid investment in tourism marketing."

Malta Hotels and Restaurants Association

The MHRA said it was pleased that the 5% VAT rate for hotel accommodation was retained, although naturally it was disappointed not to have seen progress towards a reduced VAT rate for restaurants as is the case in certain other EU member states.

"Overall the MHRA feels that the Budget measures are both realistic and sustainable and will benefit local industry. As a major employer the hotel sector is particularly pleased to see the measures aimed at improving the take-home pay of employees, through the changes in tax bands, which is an important motivating factor and reduces the potential for wage inflation.

"Additionally any improvement in the overall environment and infrastructure as a result of a more environmentally driven strategy will result in direct benefits for tourism through an improved product. The MHRA augurs that this strategy will be implemented in the shortest possible time."

The MHRA noted the Budget gave recognition to the tourism industry as Malta’s most important economic activity and that the additional ad-hoc advertising expenditure that was required post-9/11 reflected a necessary investment in the industry, "a view long held by the MHRA, that whenever major adverse trends are detected in core markets, the right response is to advertise more and to regard that expenditure as an investment."

Union Haddiema Maqghudin

The UHM described the Budget as socially just and forward-looking. The union said the Budget’s measures included social measures which take into consideration those who need most help and those who in previous budgets have had to bear more burdens.

"It is very satisfactory to see that Government is providing positive social measures like these whilst addressing the financial deficit of the country."

The UHM also said the Budget took into account the views and proposals of the entities represented in the Malta Council for Economic and Social Development. The UHM said it welcomed a series of proposals that had been discussed in the MCESD such as the adjustment of income tax bands, part-time work and casual social assistants’ working conditions, environmental measures, the introduction of a high cost of living index for single pensioners, the collective agreement for public service workers and better working conditions for casual workers.

"This budget also takes care at improving education and training, especially with regards the Employment and Training Corporation and technical education within MCAST, these both being another step for our country to have better education and training."

The UHM said it welcomed the increase in economic growth and the measures which served to foster investment and help the self-employed and SMEs. "Such measures are important because they directly affect the economy’s needs."