25 November 2004

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A deficit reduction drive with little good news for the middle class

By Kurt Sansone

Lawrence Gonzi’s first debut as minister of finance was marked by a chilly atmosphere out in the streets as the northern winds swept over the island.
As Gonzi read out one paragraph after the other, the budget increasingly resembled the changes in the weather outside. Rainy clouds that washed the country a day before, gave way to bursts of sunshine. Gonzi’s cautious optimism flew in the face of freshly published statistics that indicated an increase in unemployment and a decrease in cruise liner passengers for the month of October.
Constantly lingering in the background, a chilly reminder of the tough measures Gonzi was delivering even if their impact is expected to be felt long term. His was a contrasting performance; upbeat at times, cautious at others and tough in other instances.

Public holidays
Without a social pact to back him up, Gonzi had no cushion for the measures that are expected to hit the lower and middle classes hard; a surcharge of 17% on water and electricity consumption, a 3% excise tax on mobile telephony, an increase of Lm10 in passenger travel tax for Maltese going abroad, a 5c increase in public transport tickets and a loss of four days vacation leave for next year after public holidays falling on the weekend will not be added on to employees’ entitlement.
The latter measure was one of the proposals listed in the social pact measures over which no agreement was reached with the social partners and will go down well with employers, who would see an addition of four productive working days from every employee for 2005.
During the post-budget press conference Gonzi said this was the sacrifice employees had to make to help boost the economy.
The increase in productivity owing to four more working days per employee is expected to be partially off-set by the cost of living wage increase to the tune of Lm1.75 a week.

But it is the blanket fuel surcharge that is expected to cause most hardship. Adjusted every six months according to the international fluctuation in the price of oil, the surcharge will come into force on 1 January 2005 and contrary to what was promised prior to the budget it will also apply to water consumption. The charge will be levied on consumption and not on the yearly meter rent.
The surcharge will be borne by private households and industry alike. The latter’s additional expense will be capped at Lm5,000 not to impact on competitiveness.

Research and development
Gonzi announced a series of measures to stimulate private sector investment in research and development. Most notable is the reduction in taxable income for a company to the tune of 50% of expenses on social security for every employee with a PhD or Masters degree in specified areas.
To encourage youngsters with innovative ideas to set up their own companies, Gonzi announced an investment of Lm900,000 over three years in a venture capital fund. Budget 2005 also speaks of an investment of Lm1.85 million as an incentive for industry under the Business Promotion Act.
A particular measure that will give smaller enterprises a breathing space is the waiving of penalties that have accrued on overdue VAT payments. This measure is expected to have a cut off deadline by when those affected will have to pay VAT due.
As for tourism, Heritage Malta will see its budget more than triple to Lm1.65 million while the Malta Tourism Authority will have an allocation of Lm8 million. Gonzi also promised a tax exemption on donations made to museums or heritage organisations while the Ggantija temples in Gozo will be restored for a total sum of Lm100,000.

Government expenditure
Without delving into specific measures and how these will be implemented Gonzi spoke of a drive to curb government expenditure by amalgamating authorities and entities with overlapping functions. He also announced stronger controls on public sector employment as well as performance bonuses for top civil servants linked to particular departmental targets.
Gonzi also spoke of the need for greater flexibility among public sector employees in terms of redeployment exercises that will be undertaken in the civil service.
A financial control unit within the ministry of finance will be scrutinising operations of entities and authorities that do not fall under the remit of MIMCOL to ensure expenditure is in line with established targets.

Combating abuse
In a tough tone Gonzi announced a series of measures to combat abuse at different levels. Budget 2005 is expected to hit VAT evaders, particularly in the construction industry, hard. Before applying for water and electricity services on newly constructed dwellings, the person concerned would have to not only produce a compliance certificate from MEPA but also the VAT number of the contractor and a list of all expenses made. The information will be passed on to the Tax Compliance Unit.
Gonzi also announced mandatory training courses for registered unemployed. The courses will range between 16 and 52 weeks and anybody refusing or failing to attend will be struck off the unemployment register. Without specifying how, Gonzi also spoke of a drive to curb abuse in the Invalidity Pensions scheme, for which boarded out individuals are eligible.
Another attack on abuse, expected to hit bus drivers who mix diesel with kerosene is the immediate increase in the price of kerosene to 34c4 on par with that of diesel.

Three particular measures expected to boost female participation in the work force were included in the budget. Women returning to productive employment after more than five years of inactivity will have the added incentive of having their first year at work tax free.
Gonzi also announced a change in the tax on part time work for married individuals with a joint computation. Without delving into specifics the Prime Minister also spoke of incentives to industries that help set up child care facilities for their employees.

Budget 2005 has a list of measures targeting the environment with a partial refund being promised on purchased products that utilise solar energy and electric cars. Government will also offer an exemption from duty on bio-diesel.
Gonzi also announced more bad news for consumers as the eco-contribution, expected to rake in a total of Lm6.5 million, will be levied on a wider range of products in 2005.

These products include household cleaning products, personal hygiene products, chewing gum, mattresses and gunshot pellets.
He also announced a greater drive to start restoring the country’s dumps at Maghtab, Zurrieq and Gozo as well as the introduction of a waste separation scheme.

Social touch
Gonzi’s social touch did not go amiss albeit the measures announced only target marginal sectors and are not expected to have a wide impact on the working and middle classes. He spoke of a marginal increase in Children’s Allowance for families with four children and more, expected to have an impact on around 1,000 families.
Disabled individuals will be refunded VAT paid on specialised equipment bought for personal use. Parents who pay for their disabled child’s facilitator in a private school will be exempt from expenses on facilitators.

Budget 2005: The main measures

Indirect taxation
- Fuel surcharge of 17% on electricity and water consumption (excluding the meter rent) for every household and industry from 1 January. Industry will not pay more than Lm5,000 a year. Surcharge will be reviewed every six months
- Excise tax of 3% on mobile telephony calls and rental
- Passenger departure tax increase by Lm10 for a total of Lm20 for tickets bought from 1 August 2005
- Excise duty on insurance policies excluding health and life, will be 10% of value and policies under Lm5 would be exempt
- Kerosene to cost 34c4 with immediate effect with the price now on par with diesel
- Increase of 5c in bus tickets from 1 January

- All public holidays falling on a Saturday and Sunday will not be compensated by an extra day of leave. This means in 2005 an increase in four productive working days for industry
- Unemployed will have to undergo mandatory training or be axed from register
- From 1 January women who return to productive labour after five years of inactivity will be exempt from paying tax for the first year
- Cost of living wage increase Lm1.75 a week, pensioners get two thirds increase

Incentives for industry
- Tax exemption on research investment from 150% of investment to 200%
- Reduction in taxable income to the tune of 50% of expenses on social security for every employee with a PhD or Masters degree in specified areas. Applicable for three years
- Lm1.85 million investment for industry under Business Promotion Act
- Scheme that allowed small companies to deduct from their profit any expense made on information technology is now extended to companies employing less than 11 full timers.
- Government to invest Lm900,000 over three years in a Venture Capital Fund
- Waiving of VAT penalties for those who pay overdue VAT up to a stipulated deadline
- Various fiscal measures to encourage film industry

Tourism and heritage
- Heritage Malta allocation increased from Lm400,000 to Lm1,650,000. MTA budget set at Lm8 million
- Investment of Lm100,000 for restoration of Ggantija temples in Gozo
- Tax exemption on donations made to museums or heritage organisations

- Partial refund on products that utilise solar energy and on electric cars
- Exemption from duty on bio-diesel
- Eco-contribution levied on more products including gunshot pellets, chewing gum, household cleaning products, personal hygiene products, mattresses and electrical products

Social measures
- Marginal increase in Children’s Allowance for families with four children and more
- Disabled persons will get back VAT paid on specialised equipment for their personal use
- Parents who pay for their disabled child’s facilitator in a private school will be exempt from the expense for facilitators

Attack on abuse
- Those who apply for new water and electricity meter have to present MEPA compliance certificate and architect’s declaration plus amounts paid for all services rendered in construction of property. Information will be passed on to TCU.
- Measures to attack abuse in boarded out scheme
- Measures to combat people who work while registering


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