Tax holidays and achievable targets

Ultimate gimmick or economic foresightedness? Labour Finance spokesperson Leo Brincat justifies the party’s latest pre-election novelty to MATTHEW VELLA

The tax holiday Opposition Leader Alfred Sant announced late last week sent a number of alarm bells ringing.
Many are awaiting the 60 tax-free days a new Labour government will herald in, although no date has been fixed as yet. No figures either have been fixed for the several bonuses to be distributed to dependants.
Others fear the incentive would drain the country of a vital source of revenue, much-needed income to aid the top-heavy social structure bubble. The critics have accused Sant of attempting to buy the electorate with a short-term gimmick.
Leo Brincat, Labour’s finance spokesperson, is not worried in the least. He says a few plusses and minuses here and there will bring the new Labour’s fiscal novelty ‘home’.
"If you had to see the current expenditure of the government in these last years," he says at the Mile End headquarters in Hamrun, "you would see an expenditure of around Lm25 million per annum. Given that a new Labour government will not be going to keep up with the EU harmonisation, I would say we are already home on the subject."
Brincat is points at waste spending in the government’s drive towards EU membership: "If we use the same professional cost-control measures in the Maltese private sector, we can make a lot of savings, especially where there is a lot of waste.
"You also have the consultancies. I don’t mean to say we don’t need the consultancies, but we believe these have to be scaled down and eliminate duplication in foundations and other government bodies. I think we can make lots of savings there."
This is what Labour talks about in its manifesto. Cutting down on waste while stepping up capital expenditure. And as an appetiser, the tax holiday Sant will give to all taxpayers. According to Sant, the series of tax exemptions to the self-employed and wage earners and bonuses to those students, unemployed and pensioners, will all be part of a Lm25 million fund.
But Labour is talking about a constant yearly six per cent capital expenditure for health and education as well as other projects that it believes the PN government neglected since day one of their 1998 legislature.
So where will labour get its money from? Taxes, is the likely answer.
"We think the biggest shortcoming of the government in terms of ordinary revenue is tax collection. If one sees the report of the auditor general, we realise the amount of overwritten taxes being at circa Lm47 million written off and around Lm400 million that are still due. If there is a serious effort, by any government, to recover those funds, that already is an adequate measure.
"However, we are hinging everything on economic growth.
"Any government has three main sources of revenue, namely new taxes, tighter tax enforcement, and the stimulation of economic growth. Government has been a little bit ambivalent in its reaction to Labour’s economic growth figures. We are envisaging a nominal growth of between five and six per cent – we feel that with some concerted effort we can even surpass that target, but we did not want to commit ourselves to a figure that might not be achieved, which is why we made achievable targets."
This makes Labour’s job somewhat easier. They are preparing short-term plans with a tax-break, the economic effects of which could result in nothing of what the MLP is expecting. Its long-term plan, economic growth, is also based on one percentile mark over the PN’s expected economic growth for 2002.
"I don’t think the tax break should be seen in total isolation," Leo Brincat says, "We are being prudent in what we promise. Our first priority is not to increase the tax burden, but actually easing it.
"We are placing emphasis on tax collection. This government had a certain measure of success in tax collection. When Minister Dalli consulted us on the creation of the Tax Compliance Unit, we had shown our reservations that this was going to be a semi-autonomous unit easily manipulated and misused by politicians.
"Our view is that throughout the legislation, we should explore the possibility of having the TCU being gradually channelled into the Inland Revenue, the latter having a more investigative role. This would create one main source that would provide access to information on individuals with regards to national insurance contributions, VAT, income tax and other taxes.
"However, when we discussed this with the then-Shadow Finance spokesman John Dalli during the Labour government, he pointed out that too much information sharing could send a wrong signal to prospective investors, when considering our financial services and double taxation agreements.
"Today, since the element of secrecy has been eliminated from government, I see Inland Revenue assuming the roles of the TCU, with some legal modifications. The TCU has unfortunately developed too much as a ‘state within a state’. We have had reports indicating the application of ‘two ways, two measures’ and a stalling of activity in the run-up to the elections. We also feel that certain fat cats are not being investigated. Government has the priority to emphasise primarily on those people with certain lifestyles and living beyond their means."
The tax holiday was also extended to the agricultural sector, with a very generous exemption from five to ten years. The PN screamed ‘opportunism’, the criminality of a pre-election titbit aimed to satisfy the disgruntled voters.
Leo Brincat discredits The Malta Financial and Business Times’ sources. Reliable sources tell us not more than Lm300,000 is paid in income tax by the agricultural sector. Leo Brincat says more than Lm1 million was paid by the sector.
"We feel agriculture is a strategic sector. Maybe in terms of GDP its contribution is not as strong as financial services or manufacturing, but we feel the sector needs encouragement to be sustained. As you know, the agricultural sector is a diminishing one. We wouldn’t like to see it wiped out completely.
"We fear that despite the generous government hand-outs to agriculture, due to the EU, ultimately farmers will not be in a situation to withstand the competition. What the government is doing, in a politically-dishonest way, is that which had been planned for the agriculture over a span of ten years, is being compressed into a two-year period.
"This means that the bulk of EU funds and subsidies Government will be paying out over the ten-year period is being handed out in the first two years. So most of the burden will have to be carried by the taxpayer in the first two years, definitely a greater burden than the tax-break being offered."
With Lm25 million being notched off the Inland Revenue count, how much could this affect the social security sector government is trying to keep hold of.
"We are not looking at the social security sector. We are making a commitment to encourage private pensions, and guarantee the state thresholds in social security. These pensions, however, have to be voluntary since it is actually quite hard to channel extra money into a private pension.
"We are not saying the demographic problem will never surface, but we don’t agree with Government’s projections. If one sees certain studies, we can deduct that an increase in female participation in the workforce could actually allay this problem, since there would be more gainfully occupied. I am not saying it will be solved, but postponed. Priority-wise, the deficit is more important in this time.
"Although we see this as an issue that has to be addressed in the medium to long-term, we don’t think this is an immediate priority. Although we did not participate in the Welfare Commission, we felt the government was very sluggish in this process. You had the Galdes Commission failing to deliver due to ministerial interference, with Mr Galdes resigning. Then there was Henry Degabriele who took over on an internal basis, and subsequently there was Mr Schembri from KPMG.
"When I asked in Parliament what the outcome of this new appointment had been, I was told by Minister Gonzi that Mr Schembri was handling the correspondence. Now this Commission has been established since 1999 and nothing concrete has yet prevailed."
The pre-election tax holiday offer’s scent sets off a trail, a timely announcement serving to turn heads round to see what Labour is doing. And yet, no figures are available for the bonuses to be given to the unemployed, students and pensioners.
"At the moment, we do not have any figures, although there are certain hypothetical workings based on these proposed bonuses.
"Minister Dalli said there will be a situation where if someone received Lm4,500 a year, they would only be taking a Lm5 decrease through tax exemption. We are saying that if there is anyone who will be having less tax exempted than the standard bonus, these will be compensated to have the bonus."
Critics have also accused the MLP of toying with a vital source of money for a short-term effect that might not materialise.
On two fronts, an unprecedented increase in spending will only serve to slightly aggravate the balance of payments problem, with a global figure of Lm25 million spent on imported goods. The money will be a clean transfer outside the Central Bank reserves to beyond our shores.
On the other hand, a feeling that economically stringent days will lend consumers a greater propensity to save their short-lived wealth, rather than spend it, and lubricate the economy.
What type of kick-start has Labour guaranteed?
"I think that some of that will be saved, but I also think there will be a major propensity to spend, especially if there will be two bonuses before the statutory government bonus. From the reports I have, it seems the government bonus is not saved but spent, so I see no valid reason why it should be saved. Of course, there will be a better feel-good factor and an increased propensity to spend.
"Some positive effect will certainly be left over. We want to get to things moving. It is a spark, a catalyst. The real shake-up we want to see moving is tourism, where the multiplier effect really gets working and starts flowing into hundreds of other sectors and ancillaries.
"One must therefore make a difference between our short-term plans such as the tax break and the medium to long-term plans in tourism. If you had to see the latest statistics, despite the 9-11 factor, we can see our gross earnings reducing drastically. In 2000, before 9-11, gross earnings decreased by Lm3.2 million, and in 2001 earnings decreased by Lm7.5 million, and in 2002 these decreased by Lm14.2 million. So it looks like there is some structural problem here.
"Of course, today we are not looking at tourism in the form of arrivals only but in terms of product development. The principal problem today is beyond the hotels, and this means environment, roads, and the whole works, dragging our standards below those of our competitors."
So without the EU funds, EU benchmark standards, and the accountability of our ministers to EU institutions, how will this product be improved if not through taxation?
"I think that all it needs is good will, whether it is a Labour or Nationalist government, that decides to apply the EU norms, without needing a whip.
"Lm81 million in funds have to be seen in all their totality. The figures given to me in Brussels on one of the conferences on enlargement show that our absorption capacity is Lm55 million between 2004 and 2006. France has the ridiculous absorption capacity of 28 per cent for every Lm100 million. In Malta’s case, the EU is envisaging that until the end of 2006, Malta would have managed to absorb Lm55 million of these funds.
"With all our good willpower, we can achieve good environmental standards without being full EU members, even financially."
So will taxes have to be increased?
"Our idea is to have a financial package that is neutral. We are not saying we are going to be getting Lm81 million from the EU. But we are not giving the financial package any priority in our negotiations with the EU. We think that we can still make ends meet on our own resources, and through economic growth, without having to wait for these hand-outs by the EU, which in the long run would not be as generous.
"There will be financial protocols which we will achieve on different sectors, but our ultimate objective is not to get so many millions from the EU.
"We will not have any financial obligations with the EU, and of course, you will not be expecting the hand-outs from the EU either."