A comprehensive pre-budget document was issued in the summer and finance minister Tonio Fenech had welcome comments from institutions and other interested parties. This is an innovative idea of widening the consultation process and bears a hallmark of an active and young minister who has been saddled with an unprecedented international financial mayhem linked to a global credit crunch. Without having access to the 2009 Budget, I have written this article based on certain comments in the media. The majority formed part of the heated proposals debated at the MCESD. Many observers pleaded with government to start creating incentives for employers to invest more in the training of their staff so that training becomes a continuous process. Tax breaks for trainers should act as an incentive and more direct means of assistance should be introduced via wage subsidies. Cutting down on rhetoric, one hopes that the 2009 budget should be one aiming to restore confidence and hope in the economy. This is the time for men to be sifted from the boys and a pragmatic approach taken to beg, steal or borrow the extra cash required to heal the wounds of a looming recession. Prancing around with hard sell about bureaucratic offers of help will not wash this time. Palliatives need to make way for surgery since the engine of growth is sputtering. Granted that some complained that the introduction of higher electricity tariffs and the removal of the cap on high-energy users such as hotels and factories was not announced at the pre-budget debate. The government is adamant in its policy that no subsidies can be tolerated and any reductions in the past have to be immediately removed so that taxpayers do not subsidise the productive sectors, even if the latter may start laying off workers due to a drop in competitiveness and general lack of orders arising from a slackening in demand. Effectively once the subsidy is lifted then one expects that the taxpayer is compensated either directly by a reduction in VAT or by other measures such as a lowering of the tax bands. The penny has dropped and Enemalta made a case of receiving an extra financing of about €55 million to balance the books amid high cost of crude. Naturally this extra cost will further diminish our competitive edge especially where exports and tourism are concerned but such is the hard reality.
Yet the drop in Malta’s competitive advantage on account of government induced costs, higher energy is a fundamental aspect of the compensation expected in the 2009 budget. Only this way can it be labelled as a budget with responsibility, sustainability and solidarity. Incentive legislation is the flavour of the month in most EU member states each harkening on how best to alleviate the financial hardships been faced by industry. The optimum remedy is never simple, yet we notice as an example how the OECD countries have each drafted a stimulus package partly by reducing top corporation tax rates. Typically, we cite the success reached by the Celtic tiger in the attraction of a robust financial services and manufacturing sector - which were amply helped by reducing the top rate of corporation tax in Ireland. This cascaded from 38 per cent to 12.5 per cent between 1996 and 2003, a period in which growth rallied by 9 per cent a year. Can we emulate Ireland and start a root and branch reform of our taxes levied on industry so as to boost productivity. It is now much desirable and all stakeholders request it. A stimulus will result in a freer economic activity, increased national wealth and in the long run greater revenue for the state coffers. In fact employers have been acting in unison to demand some respite from the cold pangs of a recession surfacing in European economies. Likewise, operators in the tourism industry are forecasting a poor outcome next year so the sector needs a boost if it is to regain the vitality it always had in our economic development.
With lower incomes and dispossessed from their homes, British tourists are facing their own uncertainties as a result of economic slowdown - which is encouraging them to stay at home. Equally, the construction industry may also start feeling the pangs of excess building stock - a casualty of reduced demand and over zealous MEPA permits.
In Ireland, construction firms were forced to trim workers from payroll or at best go on four-day week. So to revive, we need to put more coal in the fire and borrow more for the short term. Even the Commission seems to be taking a favourable view of temporary overrides on the Maastricht criteria. Quoting Prof. Cordina, he suggests that the government should draw on a bigger deficit and invest the money productively to boost the economy.
“It will be a big mistake if we curtail public productive investment now on the pretext of balancing the books,” he says. Another novel idea is to appoint a tax Ombudsman who can act as a shelter for taxpayers protecting their rights against potential misuse of “best of judgement “ claims and lightening up the alleged strenuous pressure exerted by TUC over corporate taxpayers. Being more considerate on smaller firms who are cash strapped with high electricity and general overheads should see the elimination of draconian measures taken by the state in levying interest and penalties over late submission of returns.
Without further ado SMEs have been clamouring for a no frills venture fund linked with real tax concessions for seed capital. Here we can recall how the promised venture fund which was recently introduced with much fanfare has not been fully utilised. Will local banks which have lost so heavily on their foreign investments start becoming more risk averse? Particularly, small operators will face financial pressure during the economic downturn, yet more than ever, cash is king but this has to be borrowed. Businesses cannot afford not to manage cash as a priority ultimately may not be able to pay their liabilities and consequently risk being forced into liquidation.
It goes without saying that in the 2009 budget the government needs to take account the looming recession in US and Britain. Many countries have dug deep in their pockets to bail out ailing banks which suffered immensely from dubious lending in the past. So why can’t we do the same and start putting our money where our mouths is by offering tangible and less bureaucratic assistance by way of tax cuts possibly by selective reductions in vat aimed to stimulate consumption.
The present tax regime consisting of both direct and indirect taxation is captivating more than 35 per cent of GDP and of course this take is drying the cash lake. New methods can be introduced in the budget to best meet the goal of collecting revenue in the simplest, fairest, and most transparent manner possible. Plucking the most feathers from the goose with the least amount of hissing should be the mantra. For example, hot over its heels to revive flagging commerce, the British government has cut the corporate rate from 33 per cent to 28 per cent and introduced a small companies’ rate ranging from 24 per cent to 19 per cent. In these turbulent times, ask any politician about the possibility of rallying the economy and he will start ranting about the cuts having an indefinable strain on tax revenues. The pre-election promise to balance the budget by 2010 is unreachable. Now is not the time to follow pre-election dogma just as the minister will most probably not launch a 25 per cent top tax rate for managers earning up to €60,000. Furthermore, more cash needs to be invested in the educational sector in order to improve our stock of human resources to match the competitive strains by investors expecting better trained workers. To conclude, Malta needs an expansionary plan immediately. The patient cannot wait. Sceptics agree that managing a economy in a downturn is all about being flexible, anticipating and reacting quickly to changing circumstances.
George Mangion
Partner at PKF – an audit and business advisory firm [email protected]
