19 November 2003

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Government not getting backing for budget measures

- GRTU stands against VAT increase

By Julian Manduca
The GRTU yesterday joined a chorus of disapproval from the constituted bodies and yesterday announced its opposition to any increase in VAT.
"The GRTU is categorically opposed to any increase in VAT. An increase will mean that the public that pays the tax and the self-employed that do their duty to collect VAT (which involves much work and is done without any remuneration) will suffer and have to make good for the deficiencies of others," Director General, Vince Farrugia said in a strongly worded statement.
Farrugia said consumers are already heavily taxed and any increase in VAT will further erode the purchasing power of consumers.
"Many products will not be able to stand a price increase as the market will not handle them and taxes will have to be borne by the businesses.
"That is why inflation has fallen to its lowest level in the last 20 years. Increased prices will have a negative impact on investment levels and employment in the service industry," Farrugia added.
The GRTU said the service industry was making up for the loss of jobs in the manufacturing and tourism sectors and loses experienced by large companies that are dismissing employees.
Farrugia does not believe the solution can come from government bonuses, as is being suggested. "Private enterprise will have to increase wages because of the higher cost of living brought about by the VAT increases. Malta’s ability to compete will be adversely affected by the increases and Malta cannot afford the expected spiral of price and wage increases."
The Prime Minister has already made it clear that VAT will be increased in the next budget, emphasising that there was a need for people to show solidarity. The VAT increase is expected in part to go to a fund to support Malta’s welfare reform.
The General Workers Union has made it clear that it will not accept ‘unpopular’ measures lightly, and is demanding compensation especially for workers and the elderly.

If the government does agree to compensate, and it is widely expected to do so, this would mean that the impact of increased government revenue will be offset by the compensation to be paid.
The Federation of Industry on its part has called for lower costs for industry should the VAT increase go ahead. The argument being that higher prices will lead to claims for higher wages.
The FOI has put forward the argument that while salaries cannot be capped, but is calling for an increase in productivity.
President Anton Borg pointed accusing fingers at over employment in the public sector as well as half days for government employees in the summer and port costs. Borg said that if there were less employees at Enemalta, for example, the price of energy should decrease.
As has been highlighted several times, Malta’s port costs are much higher than our competitors and proving to be damaging to industry.
No matter what finance minister John Dalli and his Cabinet decides for the Budget Monday, some, or many, people will remain disappointed. Already the FOI, GWU and GRTU have shown opposition to suggested VAT increases. However, given that Malta’s economy has not been performing well and it endures such a large deficit, the worst that Dalli could do would be not to introduce any changes.
That would be an unthinkable option, and nobody seriously believes Dalli will hold back. Debate rages as to what impacts tax increases will have, and it is not clear that budget increases will be restricted to VAT.
The present government brought income tax down from 65 to 35 percent, and Dalli could feel there is room for increase there, especially since income tax in EU states is generally higher than that in Malta.
Tax on certain unhealthy products in inelastic demand will probably face higher taxes so cigarettes and alcohol will be more expensive next year as, most probably will petrol.
When government calculates what should be given as a rebate to make up for increased taxation, it must calculate to pay out less than it will collect from increased VAT. It would serve social justice if the compensation is only given to those that need it.
Minister Dalli must make a reasonable attempt to come to terms with our budget deficit, which over the years has proved to be a major headache, so government revenue must be raised somehow. While there is room for cost cutting in the public sector, there is a limit to how much can be cut. Malta must make up for up to Lm150million Liri and a few thousand here and there will never do the trick.
What Dalli must be very aware of is that he cannot square the circle. He finds himself in a situation forced to raise revenue, and a lot of it, without causing more economic stagnation, which will have the opposite effect. That is why a selective increase in VAT mainly on goods which are in inelastic demand, my be the best way to go. That will mean that people will not be discouraged to spend and government will raise more revenue. Whether it will be enough however, at this point in time, remains questionable.
As a solution to Malta’s economic problems, the GRTU is suggesting cutting down on public expenditure, the introduction of practical ideas to encourage efficiency and more jobs. The Malta Financial and Business Times contacted Vince Farrugia, to ask him, if that would be enough to set right Malta’s deficit problems, but no reply was received at the time of going to press.

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