05 November 2003

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Is consumption tax on government’s mind rather than VAT?

The announcement of proposed tax increases usually brings about a veritable hoo-ha in any country, but amazingly, the recent revelation, so far not denied, that government is proposing tax increases as part of its welfare reform has raised many questions, but little to no public debate.
Besides Labour spokesperson Leo Brincat, who spoke in Parliament, very little discussion has gone on in the media.
Brincat told The Malta Financial and Business Times that he would rather not speculate about the issue at the moment, but in parliament indicated he was not pleased about the suggestion that government may raise VAT to 18 percent.
Constituted bodies that will be involved in discussions with the government at the weekend preferred not to comment at this delicate stage, and while economists contacted by this newspaper had there own ideas on the subject, they were on the whole unwilling to be quoted publicly.
In the pre-election months and in the PN electoral manifesto, there was no indication that VAT would increase and minister Dalli had promised there would be an easing of the tax burden.
If there is an increase in VAT there could be an increase in government revenue, but this is likely to be more than set off with lower disposable incomes. The eventual effect could be deflationary rather than as one would expect inflationary as consumer spending decreased because of the higher taxes.
Lower disposable incomes would mean less available income for private pensions which would also seem to be on the cards as part of welfare reform.
One of the economists that The Malta Financial and Business Times spoke to, who preferred not to be named, said that the government’s proposal was not actually to increase VAT, but to introduce a consumption tax.
The difference, he explained, is that: "In the case of a consumption tax this can be imposed on certain products and services and can be temporary. The idea would be to fine tune the economy and improve its tax raising possibilities with the proviso that the taxes could be removed once that was achieved.
"An increase in VAT would not be the same thing as VAT is subject to certain regulations and, for instance, once an increase is decided upon, it is not likely to be reversed."
The Malta Financial and Business Times contacted Economist Prof. Scicluna, who said that he would not like to speculate on what might be included or excluded, since it is the whole package which counts. However, what he knows for sure is that the rating agencies will be studying the forthcoming budget with even keener interest than normal.
Economists Lino Briguglio and MFSA chairman Joseph V. Bannister were contacted by this newspaper, but preferred not to be quoted.
The unions and constituted bodies have been given a week to consider the proposals and will be meeting government representatives on a three day ‘retreat’ of the Malta Council for Social and Economic Development, starting Friday to discuss the proposals.

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
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