26 November 2003

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Increasing taxes alone will not curb deficit, experts warn

By Kurt Sansone
Minister John Dalli has everybody on his side when he insists that the fiscal deficit needs to be addressed. It is the method adopted to tackle the problem that gives rise to critical opinions on the subject.
Raising taxes, although not a popular measure, is probably less politically sensitive than cutting expenditure in social services and public sector employment, and thus may suit the minister more. But accountants and economists are warning that reducing the deficit by simply increasing revenue may have its problems.
For economist and university lecturer Gordon Cordina it is imperative that in the future, priority be given to the expenditure-control aspect of deficit reduction.

Limiting his contribution because of other commitments with the Malta Council for Economic and Social Development, Prof. Cordina told The Malta Financial and Business Times that government must aim to curb expenditure and cut taxes in the future.
The Malta Financial and Business Times also spoke to accountant Steve McCarthy, whose assessment was similar to that of Prof. Cordina. Mr McCarthy described the budget as a big disappointment because government chose to tackle the deficit by raising taxes rather than stimulating economic growth.
Mr McCarthy said that government opted for the negative way of reducing the deficit by increasing the VAT rate.
"This will result in less consumption, less investment and less jobs created. It would have been better had government tackled the deficit by attracting investment, instituting measures to stimulate an increase in exports, ensure an efficient public sector and invest in infrastructure. This would automatically contribute to an increase in government revenue without the need to raise taxes," Mr McCarthy said.
He insisted that Government was tackling the deficit problem the wrong way and expressed his fear that the measures taken could instigate the economy to go into a recession.
Mr McCarthy added: "A growth rate of less than two per cent is unacceptable. We should be aiming for a growth rate of five per cent by encouraging investment in research and development, attracting foreign direct investment and ensuring an efficient public service. Furthermore, it is government's job to create an economic climate suitable to attract FDI."
On the subject of welfare reform, Mr McCarthy considered it wise that welfare reform was postponed for another six months.
"The delay is good because we need to have the studies in hand to identify where the problem truly is because when we match up national security contributions solely with retirement pensions we actually have a surplus not shortfall. Furthermore, we have to obtain a national consensus for the reforms to be a success."

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