Outlining government’s plans for the next year, the pre-budget document to be published next Saturday is expected to propose a change in income tax bands, with the most likely option to be taken up for the forthcoming budget being an increase in the non-taxable portion for both single and married individuals to Lm3,500 and Lm5,000 respectively.
The current non-taxable portion for single individuals is Lm3,100 while married individuals do not pay tax on the first Lm4,300 earned.
Expectations are high that the Prime Minister will announce a change in income tax bands next Saturday, but with the finance ministry in possession of the final workings drawn up by the working group for tax reform, it is very likely there will be no final commitment as yet.
The working group has drawn up different scenarios for possible tax reform, including a less progressive tax structure that reduces the tax bands to three and the lowering of the higher income tax rate to 30 per cent from the current 35 per cent.
The suggested tax cuts could leave government with a shortfall ranging anywhere between Lm20 and Lm50 million. It is this drop in revenue that will have the Prime Minister scratching his head since it may very well destabilise his plans to continue reducing the deficit below the three per cent threshold in line with the strict Maastricht criteria for adopting the Euro.
Apart from proposing a possible tax cut, the pre-budget document is also likely to contain some more electoral massaging by proposing a reduction in the passenger tax and a dedicated section with specific measures for Gozitan businesses.
Last year’s increase in the passenger tax, hit hard and wide, especially among an overburdened middle class. But with government facing the possibility of having to refund the additional passenger tax levied since August last year because of pressure from the EU Commission, it is this threat that is more likely to force the finance minister to announce a reduction in this tax.
The particular measures to be announced for Gozo are directly linked to the Nationalist Party’s haemorrhage of votes in the traditionally blue sister island. On the back of a depressed economy, Gozitans have fared far worse than their Maltese counterparts. The tourism industry in Gozo has taken a serious pounding and the manufacturing base has almost disappeared.
As a result, unemployment in Gozo has edged upwards and more Gozitans have had to travel to Malta to find jobs, a very sticky argument for the islanders.
Government will try and woo back the disenchanted Gozitans by targeting specific measures which could include a reduction in licence fees for businesses operating in Gozo.
Other measures targeting SMEs are also expected to be proposed.
On Saturday, Gonzi will insist that the pre-budget document is not binding and will need to be discussed nationally. It is still a long road to November and government will also be keeping its eyes peeled for further increases in the price of oil. A tax cut and rising oil prices may not be the right recipe for joining the Euro unless government embarks on a massive sale of public assets to rake in one-off revenues that would placate any financial black hole, at least for next year.
Whether budget 2007 will be sustainable in the longer term will have to be seen when Gonzi stands up in Parliament next November to deliver what could very well be his last budget speech before the next election.