09 August 2006

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Business Today

Gonzi’s calculated gamble

The time for sacrifices is over; or is it? This is the pertinent question that Lawrence Gonzi answered with a very cautious ‘yes’ when presenting the pre-budget document 2007. KURT SANSONE finds out why.

It has not been an easy task to reduce the deficit to below the magical three per cent of GDP but sounding very confident, Lawrence Gonzi and Tonio Fenech, the duo that have steered the country’s finances for the last two years, are almost certain that the country will end 2006 with a shortfall of Lm55 million.
Going below three per cent is an important milestone but nonetheless, it remains a milestone pointing towards the longer road ahead. Reaching destination ‘E’ by July 2007, when the European Commission and the European Central Bank will deliver their final assessment on Malta’s eligibility to join the single currency, is still a perilous journey.
Within this context government has very little leeway to release its iron grip on the ordinary citizen’s personal finances by way of tax cuts or new social benefits. And in what can be described as a calculated gamble, government has quantified the maximum amount of revenue it can forfeit in 2007 to give a signal that the worst is over and people can now begin to enjoy the fruits of their sacrifices.
A package of benefits and tax cuts worth Lm8 million is all Lawrence Gonzi can contemplate in the next budget without undermining the fiscal consolidation targets that would allow Malta to achieve its aim of adopting the Euro on 1 January 2008.
It may sound a lot, but Lm8 million spread out on a population of 400,000 will hardly leave any substantial positive impact in people’s pockets and the financial package is conditional on the continuation of economic growth performance along the current and “expected path”.
“Prudence” is Gonzi’s battle-cry as he tries to steer MV Malta across the choppy seas of international instability created by rocketing oil prices and the unstoppable phenomenon of globalisation.

Income tax bands
The pre-budget document lists a number of measures that would give people some financial reprieve including a change in income tax bands.
Without entering into detail as to how the bands will be changed, the document suggests extending the zero band of income tax and retarding the onset of the maximum rate of tax by adjusted subsequent income tax brackets. The suggestion made by the Tax Reform Commission, whose report government won’t be publishing, to lower the average tax rates, including the maximum rate, will not be taken on board.
The rationale behind government’s thinking is that the two identified measures would “potentially extend over a wide section of the population and the labour market, facilitating work and productivity and stimulating consumption and saving.”
But the section talking about a change in income tax comes with the ominous warning that any potential loss in net revenue next year, “beyond the earmarked Lm8 million would have to be made good by other measures, such as further expenditure reductions or by shifting the burden of taxation through additional revenue sources that might be identified during the consultation process.”
Apart from containing expenditure, government won’t drastically cut expenditure. To do so it would need to dispose of a number of public sector employees and that would be very damaging on the eve of an election. The more plausible solution would be to shift the burden of taxation.

No answer
And this is the question many people are asking. If the economic situation is still very delicate, from where will Lawrence Gonzi finance the Lm8 million or more in tax relief?
The pre-budget document offers no answers. It puts the onus on the general public and different stakeholders in the country to suggest additional revenue sources for government.
During the press briefing that launched the pre-budget document, Gonzi and Fenech ruled out increasing car registration taxes, hiking up planning fees or charging patients for the use of the new hospital. They effectively ruled out any increase in taxation. Gonzi was also non-committal when asked by Business Today whether he would consider a windfall tax on bank profits.
With no increase in taxation, there is little to suggest from where government intends making up for the loss in revenue, which is expected to be higher than Lm8 million if Gonzi goes ahead with introducing the other benefits listed in the document.
The key to this dilemma can possibly be found on page 98 of the pre-budget document where it is amply stated that “the measures presented cannot all be implemented in the forthcoming budget, but one competing against each other in terms of priorities that the public consultation process will indicate within the established financial envelope.”
Whether such a strategy is consonant to winning a general election is a different matter altogether even if the Prime Minister patronisingly suggested that the pre-budget document intended to secure the future for the next 20 years, rather than the next 20 months.
At the end of the day Gonzi may decide to stick to the Lm8 million tax-relief target not to rock the boat ahead of the Euro and he will have to decide which of the listed measures to leave out.

NI contributions
Apart from a change in income tax bands, the document suggests the removal of the minimum threshold for National Insurance contributions for part-time work to be replaced by a pro-rata contribution on income earned. This measure could potentially cost government around Lm1.5 million in lost revenue but it may also encourage more people, especially women, to register as part-timers allowing government to claw back some of the potential loss.
The document also suggests streamlining company taxation but makes it clear that there will be no lowering of the highest income tax rate, currently set at 35 per cent.

Energy benefit
Responding to the serious financial burden created by the exorbitant surcharge on utility bills, government is suggesting introducing an Energy Benefit to provide adequate compensation for the surcharge.
This new benefit, to form part of the country’s vast array of social services will be based on household income and size, and household consumption of water and electricity. It will benefit low-income earners and persons who might be suffering from certain medical conditions that would warrant an extraordinary use of either water or electricity or both.
The document estimates that 17,000 households would benefit from this scheme. The cost is not quantified.
Another incentive is to encourage people to save money by investing in a private pension even though little detail is given as to how this scheme would work in practice.

What could possibly be an important move for self-employed businesses is the suggestion that the wage of a spouse employed in the family concern of a self-employed individual could be claimed as a non-taxable expense. Currently, self-employed persons cannot declare their spouse as working within their business so as to stop them from benefiting from a wider non-taxable income when both individuals declare their income separately. The suggestion is to remove this barrier in the hope that more women would be encouraged to come out of the black economy.
The costings of such a proposal are not found in the document, but what government can lose in terms of lower income tax receipts from the self-employed individual, it would be partially gaining from NI contributions and income tax from the spouse’s employment.

Child benefit
The document includes two other unquantified tax incentives; the introduction of a child benefit and the reduction in airport taxes.
The suggestion is to introduce a flat rate, non-taxable benefit for every child under care, independent of the level of income earned. This would be in addition to the current children’s allowance scheme, which is means-tested. It is unclear from the document whether this will be a one-off benefit payable on the birth of a child similar to the measure introduced by Berlusconi in Italy where parents were compensated by EUR1,000 for every child born. Once again, this measure is not quantified.
As for airport taxes, which currently contribute around Lm4 million to government coffers, the document only suggests a reduction but retaining it “at a sufficient level so as to enable the attainment of the overall fiscal objectives.”
The document rules out the total elimination of air departure taxes since these “may not be a priority for economic and fiscal policy.”
The document makes for some heavy reading given its technical nature but government will be waiting for the general public’s reaction to the proposals contained inside.
Even though they won’t admit it publicly, Gonzi and Fenech will be hoping that the public consultation meetings will not serve as an occasion for people to utter their grievances about every thing under the sun completely ignoring the 178-page booklet. And with voter disenchantment at an all-time high over a number of issues the possibility of people straying away from the subject matter in the document is fast turning into a reality the finance duo will have to face.

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Editor: Kurt Sansone
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