19 July 2006

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Business Today

Slaying inflation

Of cutting the deficit, controlling inflation and lowering taxes

Public enemy number one is the threat of inflation. Government is doing its utmost to control abuse in prices particularly those of medicines.
Naturally there are other factors that contribute to a hike in prices. The increase by 20% in VAT announced two years ago has started to bite.
Eco taxes and the fuel surcharge have also tipped the scales. It is no wonder that the Retail Prices Index in May went up by 0.52 per cent to 110.89 from 110.32 in April.
In May the inflation rate stood at 3.05 per cent. Adding a fly to the ointment, one notes that interest rates were also raised twice by 50 basis points. The pronouncement about 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 has added pressure to recoup taxes on to consumer. But surely if there is going to be higher fiscal morality, the opposition cries out that we must first start by putting our money where our mouth is.
Conversely the FOI and GRTU both proclaimed to save millions on the public sector expenditure side and criticise the exchequer on missing the target in 2004/5 to achieve a 1.5% cut .For a start the overhead cost of excess labour in the public sector, which carries an unquantified number of unskilled and semi skilled workers acts as an albatross across our neck.
It is a debated fact that a sizeable part of the Lm1.3 billion in national debt is made up of footing the bill for such a payroll. But has this expense slowed the economy over the past years or did it act as a benevolent multiplier effect to create a feel good mentality of a pseudo, albeit active economy?
Economists remind us that the luxury of excess staff is being financed out of taxes paid by the productive sectors and if unchecked it leads to more inflation. It defies logic how 33% of the labour force goes to work on half days for four months.
Ironically, this is the peak period for most manufacturing units and the ailing tourism sector. Nobody begrudges the sanitized bubble that cocoons workers in the public sector despite repeated attempts by ministers who dare not touch such a sacred cow.
It comes as no surprise that the auditors of Air Malta waxed lyrical against the invasion of 2 million arrivals. How can the Museum staff or the customs fare under the stampede?
The resistance to change and the many vested interests will play their hands clad in the finest of velvet gloves. What is lamented is lack of the ‘carrot without stick’ approach of yielding increased efficiency by benchmarking the public sector. This has been repeatedly promised by politicians but has eluded us so far. One only needs to read the critical observations by the Auditor General in his report for 2005.The bright spot is that shortly Tecom will be paving the way for over five thousand new jobs waiting ahead of recruitment in SmartCity.
How can we ever motivate public workers to retrain in ICT subjects? This can be achieved once politicians succeed in nurturing a higher level of confidence within the public sector to launch substantial skill upgrades. Again the myth of trying to absorb excess government workers in their thousands through superficial retraining is not a solution. SmartCity is not another white elephant. It is an ambitious project that if well managed will lift the standard of living for thousands of redeployed civil servants.
In principle, one hopes that inflation will be harnessed so that salary gains from such new jobs will not be gobbled up in rampant cost of living escalations.
The 2006 budget promised a study on tax reform by a team of technocrats. Party apologists laud this initiative as contributing to more spending power. They also argue that more competition will directly reduce consumer inflation. Now that the deficit is under control can we afford to emulate the success story of the UK tax reform?
In the 2005, the UK 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 like the Brits, to encourage growth rather than intensify measures to benchmark self-employed earnings with a view to extract a higher tax yield? Definitely in the near future, one expects a number of opportunities 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 Dr Gonzi has taken a bold step in presenting a tax neutral budget although the opposition party disagree whether he meted out the right dosage of a financial stimulus. The good news for us is that the EU heads of state and governments agreed on the allocation of euro 820 million. Let us hope that the windfall allocation of EU funding will effectively gravitate via public tenders to fund domestic projects that will reinvigorate the economic prospects for everyone. It cannot come a moment too soon.
Back to inflation, we all hope that the tax study will propose a fairer regime and release liquidity in the domestic trade by trimming indirect taxes. The air of expectancy is palpable and financial commentators expect tangible moves and not just cosmetic tinkering of the tax free bands.
Rumours are rife that the existing high labour taxes will be scaled down to encourage and give some breathing space for small enterprises and that banks will be encouraged to invest more in attracting international business linked to financial services.
Naturally, more VAT exemptions need to be announced for start-ups and a wider band of small traders to be relieved of bureaucracy by being zero rated. GRTU recommended that food consumed in hotel registered eateries be charged at the lower 5 % VAT rate. This and other fiscal measures will help control underlying inflation that is permeating itself in the cost of travel packages.
The competition minister is conscious that we are losing our shirt in the tourism sector as evidenced in recent reports by MHRA although the CEO of MTA thinks otherwise. Actions are therefore expected once we started the onset of the peak tourist season.
It is high time that we revisit our statute book and come up with a clever solution to slay or at least harness inflation.

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