25 November 2004

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Small business through the wringer

By George M. Mangion

Now that the budget speech is over, we can look back and reflect upon the implementation of what was originally planned by MECSD to spearhead the now rejected social pact.
Originally this social pact covered a period of three years starting 1 January 2005 to 31 December 2007. Its authors lauded it as a master plan to improve economic competitiveness, which will kick-start the economic growth from the negative levels, achieved last year. Countless discussions were held behind closed doors by the social partners to achieve a breakthrough in boosting competitiveness. With hindsight many were disappointed to hear of the collapse in the talks on the implementation of the pact. Ideally the pact had targeted to introduce long waited reforms aimed to help sustain social cohesion and further improve the social fabric through the development of human capital.
All had hoped that if properly implemented this plan would result in a projected net increase in employment of 4,500 full-time equivalent jobs partly through retraining of workers. Ironically can we say that we plan too little too late given that the unemployed list has grown by another 800 in the past year. Definitely discussions at MECSD had tried to call a spade a spade particularly it proposed to finance a much-needed national training programme. Alas this reform was not acceptable to the employers particularly as they interpreted this as an attempt to tax them at the rate of Lm0.01 per employee hour. One may well criticise the drafters of the pact particularly how and if it adequately addresses the dire financial condition of small businesses.
Surprisingly very little has been planned to help revive the ailing retail and domestic manufacturing sectors. Adding a fly to the ointment, one hears that the social pact was pronouncing a tougher stance by the tax compliance unit to extend the existing system of voluntary tax agreements based on benchmarking to all categories of self-employed persons. But surely if there is going to be a higher fiscal morality let us first start by putting our money where our mouth is. We need to save millions on the public sector expenditure side and aimed at a 1.5 per cent cut is not enough. Definitely the overhead cost of excess labour in the public sector, which acts as an albatross across our neck, cannot remain a burden to be financed out of taxes paid by the productive sector. The sanitised bubble that cocoons workers in the public sector will not last forever. One may not begrudge the generous collective agreements signed in the public sector but the promise of increased productivity and benchmarking in the sector promised by politicians has eluded us so far.
Again hoping to absorb excess government workers through private-public partnership arrangements is a pipe dream or a wish list. It is an expensive solution so we need to bite the bullet. In principle, one hoped that the time for budget rhetoric is over. Downsizing and retraining is to be effected on a compulsory basis.
The government has come in for a great deal of criticism in handling of the public debt recently, and the business and tax communities are crying out for a fairer and simpler system, but how is that to be achieved?
Can we emulate the success story of the UK tax reform? Here the Treasury announced that it intended to ensure that "the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company". In a recent announcement, the British Government has introduced a range of measures and targeted tax reductions to support small businesses; including through reform of capital gains tax, reducing the rate of corporation tax for smaller companies and the introduction of a zero rate, stakeholder pensions, and the abolition of advance corporation tax. Can we not take a proactive role to encourage growth rather than intensify measures to benchmark self-employed earnings with a view to extract a higher tax yield?
These measures are a disincentive to the creation of more small companies, hindering the morale of self-employed people to incorporate new businesses. Just paying lip service by the announcement of more aid schemes that are mired in red tape will not galvanise new initiatives that generate job opportunities. The MECSD is encouraged to bring forward specific proposals for action post Budget 2005, to ensure that the right amount of tax is paid by owner managers of small-incorporated businesses on the profits extracted from their company, and so protect the benefits of low tax rates for the majority of small businesses. As have been the case in other accession countries, the growth in small owner-managed businesses, as well as the changing nature of employment and contractual relationships, is creating new employment.
Gone are the days when politicians reduced unemployment queues by massive recruitment in public sector. Undoubtedly the driving motor of the economy is the private sector, they generate the GDP growth that create wealth and prosperity. The sector is predominantly composed of small and medium sized business.
Definitely in the near future, one expects a number of advantages for the small business in an enlarged EU community but these are not so immediately apparent to the man in the street. On a positive note the Gonzi’s administration has taken a bold step in presenting a tough budget speech prescribing the right medicine although many critics may disagree whether he meted out the right dosage.

gmm@pkfmalta.com



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