Tax holidays and achievable targets
Ultimate gimmick or economic foresightedness? Labour
Finance spokesperson Leo Brincat justifies the partys 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, Labours finance spokesperson, is not worried in the
least. He says a few plusses and minuses here and there will bring the
new Labours 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 governments 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 dont mean to say we dont
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 Labours 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 Labours 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 PNs expected economic
growth for 2002.
"I dont 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
"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
"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
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 wouldnt 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
"We are not saying the demographic problem will never surface,
but we dont agree with Governments 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 dont 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 offers 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 Maltas case, the EU is envisaging that until
the end of 2006, Malta would have managed to absorb Lm55 million of
"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
"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."