VAT increase, fiscal measures lambasted by employers’ bodies

By David Lindsay
Reacting to Monday’s budgetary measures, Malta’s constituted bodies had few words of praise for what was effectively the fruition of pre-budgetary discussions.
In a joint statement issued the five employers’ bodies represented on the Malta Council for Economic and Social Development noted that while they were pleased that a number of their suggestions were indeed incorporated into the budget, they also regretted that other measures were announced despite their "strong dissuasion" during discussions.
The announced, and widely expected, three per cent increase in Value Added Tax came in for the brunt of the bodies’ criticisms.
In the joint statement, the bodies concerned – the Malta Chamber of Commerce and Enterprise, Malta Federation of Industry, Malta Employers Association, Malta Hotels and Restaurants Association and the Association of General Retailers and Traders – made it clear that none of the private sector organisations had ever suggested or agreed with the idea of a VAT increase.
"Some organisations may have suggested a harmonisation of direct and indirect tax rates whereby an increase in VAT would be compensated for by a commensurate decrease in income tax rates. A similar measure would have brought a reduction in tax evasion," they commented by means of a joint statement.
The five constituted bodies warned that an increase in VAT on its own would be less conducive towards encouraging fiscal morality. They explain, "Such a move is also detrimental towards the country’s export competitiveness because it may fuel inflationary wage pressures. It is felt that the current low inflationary climate and the elimination of import levies will not suffice to curtail the threat to competitiveness. The reduction in purchasing power of local consumers will adversely affect the economy from the local private consumption aspect."
The measures, which were described as "counter-competitive" were said to have been taken at a time when economic expansion is at a minimum level, when employment is being shed and in the face of possible further job losses.
"The Constituted Bodies are perturbed to observe Government attempting to curb fiscal deficits by turning to the tax paying public constituted by the commercial community and low-middle income workers.
"It is clear that this budget, as presented, lacks measures which will stimulate the economy. Although the issue of competitiveness has been referred to on a number of occasions, there is no concrete measure, from the Government’s side, to secure the somewhat optimistic growth-rate of 3.5 per cent that the Government is projecting. On the other hand, the other social partners have committed themselves to enter into discussions on a new social pact.
"A reduction in the fiscal deficit should, first and foremost be brought about by a reduction in expenditure. Recurrent expenditure is set to increase by nine per cent or Lm69million."
Commenting on the fact that government’s fiscal imbalance for 2003 will stand at Lm107million as opposed to the projected figure of Lm75million set at the last Budget, the bodies advise, "It is vital that the Minister’s assurances that the country's financial situation would be stabilised in the coming three years' time will materialise.
"For this to occur, Government must make further progress in:
• putting its house in order, through a determined elimination of wastages, abuse, bad planning and mismanagement of public resources,
• implementing its privatisation programme in order to contain increases in the national debt and corresponding interest payments,
• encouraging entrepreneurship and new investment through a low-tax and efficient business environment, and
• promoting greater fiscal morality through lower tax burdens and enhanced enforcement."
Stressing that the statement is the result of preliminary considerations, the bodies said they will be analysing the Budget Speech in detail over the coming days within the context of the Economic Survey and other available information. Their formal reactions will be made public in due course following approval of the respective Councils.