29 June 2005

The Web

Sign of a shrinking economy

James Debono

In spite of the growing drive to enforce fiscal discipline, revenue from income tax and social security contributions is falling.
Comparing the figures for the first five months of this year with those of last year, Prime Minister Lawrence Gonzi must really be scratching his head. A drop of Lm2.6 million in income tax and a reduction of Lm2.3 million in social security contributions are a sure sign that the economy is contracting.
Statistics published by the National Office of Statistics reveal that for the first time since 2002 revenue from social security contributions has decreased.
Economist Karmenu Farrugia told The Malta Financial and Business Times that this drop can only be explained by a drop in the number of the people paying NI contributions; employees and self employed persons.
On the other hand contributions from VAT have increased by Lm3.4 million, thus pointing to an increase in consumption. The increase in VAT revenues can also be partially attributed to the introduction of VAT at 18 per cent on a number of new products in May 2004.
Speaking to The Malta Financial and Business Times economists Karmenu Farrugia and Vince Farrugia expressed their concern that the drop in tax revenues does not bode well for the country’s economic recovery.

Notwithstanding the drop in social security contributions and income tax, government revenue has increased by Lm18.7 million. This increase in revenue can be attributed to an increase of Lm19.6 million in grants.
On the other hand the government’s recurrent expenditure during the same five months has increased by Lm14.1 million.
The Director General of the the Malta Chamber of Small and Medium Enterprise (GRTU), Vince Farrugia observed that the three pillars of government revenue: income tax, social security contributions and VAT depend on the trade cycle.
“Since businesses are passing from a hard time, salaried employees have less opportunities for over-time and part time work, thus resulting in a drop in government’s revenue from taxation.”
Economist Karmenu Farrugia observed that the drop in social security contributions is a “very serious indication”. “Since this contribution is paid by employees and the self employed on a monthly basis, this drop is an indication that fewer people are engaged in employment or self employment.”
Karmenu Farrugia told The Malta Financial and Business Times that since social security are based on a 10 per cent flat rate on incomes, revenue from social security tends to increase due to annual cost of living increases.
“It would already be a negative indicator if revenue from these contributions remains static. The fact that such revenue is decreasing is alarming.”
According to Vince Farrugia the root of the problem is the lack of an economic policy promoting economic growth.
“The government is simply obsessed with decreasing the country’s deficit. The government is behaving like an accountant of a private firm. Metaphorically speaking the government is simply trying to pump more water from an ever shrinking pool,” said Vince Farrugia.
Farrugia’s predictions for the next seven months are far from optimistic.
“I predict that before the next budget the government will be caught in a state of panic. I cannot understand how the government expects to increase its revenue if businesses continue to contract.”
Farrugia remarked that the only businesses doing well in the country are those engaged in property and financial speculation.
“But the economy will not grow in the absence of productive investment and we can only attract such investment if we have a sound economic policy,” added Vince Farrugia.

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