02 APRIL 2003

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Labour’s tax party - economists and financial experts have their say

By Julian Manduca
The Labour Party’s proposed tax ‘party’ got off to a shaky start with doubts being shed on the desirability of the proposal all round.
Normally the public and the business community welcomes tax rebates, but it would seem these proposals are finding themselves on a slippery slope.
There are two major concerns: will the proposals stimulate the economy and will they endanger the government’s fiscal position?
Everyone will enjoy those extra few Liri to buy some early summer clothes or, if you are better paid, possibly some new electronic gadget, but will the mini consumption boom really have a significant impact on the economy?
If Labour is elected, we can immediately expect the doom and gloom that is associated with Labour parties elected to power and, in this case, more so as Malta would have missed the EU boat.
Malta’s entry into the EU would put Malta on the investment map and the economy is expected to enjoy a swift step forward. Contrarily, Malta remaining out of the EU is likely to deflate business enthusiasm and discourage enterprise.
Several notaries and estate agents have told The Malta Financial and Business Times that in the past weeks quite a few preliminary agreements for the purchase of property have been signed on the condition that the PN is elected, expecting the consequential positive impacts of EU membership. These agreements would all fall immediately should Labour be elected and it is not difficult to predict that other sectors would be adversely affected too.
While this paper could not find any economists or financial commentators who greeted Labour’s new proposals, few wanted to comment at all.
Unfortunately our socio-political scene is such that academics, economists and financial experts are reluctant to say anything to offend the political parties at this stage of the election campaign. Several university professors and lecturers declined to comment leaving Malta’s public with a dearth of opinion on what should be a topic that interests us all.
Economist Karmenu Farrugia told The Malta Financial and Business Times that the Lm25 million would have been better spent on infrastructure, whether social or physical.
Farrugia said he did not expect the measures being suggested by Labour would have a significant impact on Malta’s economy, "there will be an impact, but we economists speak about the impacts of increased spending in Malta in terms of what we call 50/50. Fifty percent of every Lm1 spent goes on imported goods, so does not constitute a direct stimulus to the economy."
Farrugia sees the proposals made by Labour Leader Alfred Sant as being more political that economic, and one where the timing looks more like a vote catching exercise.
"I do not expect the impacts being proposed by the Labour Party to be effective enough to solve Malta’s structural economic problems, it would have been better to invest the money, so that the effects would be more long-term."
"I would rather have seen the Lm25 million going on improved roads, investment in a better environment, or technical training for people," Farrugia said.
Farrugia does, however, fully agree with Labour on one point and said: "At the same time, although few will agree with me, I agree with a wage freeze for Malta. That would have a direct impact on improving our competitiveness."
University banking and finance lecturer Philip Beatie told The Malta Financial and Business Times he believes in: "tax cuts for businesses as an important weapon to stimulate domestic private sector investment." But added, "given the concrete reality of our current fiscal system, it is probable that more emphasis on variables other than corporate taxation ought to be considered.
"I am referring specifically to the expenses industry has to bear in terms of rates, fuel and electricity, telecommunications charges, haulage etc which are detrimental to local competitiveness.
"In terms of tax cuts concerning personal income tax payments, I feel the current level of personal income is not unduly high. Hence, I would tread more warily in such a direction, although the intention - if there is one here - is clearly to boost consumption spending and, indirectly private sector revenues.
However Beattie is concerned about Labour’s proposals vis a vis the impacts on Malta’s public finances: "Given the state of Malta's current public finances, a great deal of thought needs to go into promoting tax reductions - both business and personal. It is hoped that a basic minimum of econometric and scenario testing would have been conducted prior to any concrete policy formulations being made."
Economists Lino Briguglio and Gordon Cordina preferred not to comment on the issue, with Cordina telling The Malta Financial and Business Times he "would prefer not to take part in this essentially partisan political, and definitely not economic, discussion. I believe that the major points in this regard have already been tackled in the various responses to this issue."
The Governor of the Central Bank of Malta, Michael C Bonello, also preferred not to comment on the matter.

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Editor: Saviour Balzan
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