A flurry of exciting pre-budget proposals

Reading the voluminous pre-budget documents presented by both parties, one is encouraged to note how these try to give a clear vision how the country can be steered out of the pandemic next year into a new economic scenario that promises to pave the way for prosperity.

Again, it loudly cries out for the need to develop a set of fiscal incentives and/or measures of support designed to attract international R&D companies for pilot technological studies and as an innovation hub.

PKF in association with Malta Enterprise three years ago arranged for a familiarization visit to Rotterdam for the minister responsible for economy and industry to start discussions with an American world class business accelerator. The talks failed to progress and with it died the potential for a professional start-up ecosystem including angel investing and venture capital.

A number of ambitious projects have been proposed by both sides and one hopes that being on the cusp of an election, this is decision time. By sheer comparison to other smaller states located in the Med basin, we cannot be too grumpy given the hardships suffered from a wide-ranging pandemic that played havoc with the severe drop of tourists, an industry which we were and still are so dependent for economic generation.

The fact that tourism yielded €2.2 billion in 2019 is a stark reminder how this marks a substantial slice in our GDP. As Warren Buffet once famous quote, he remarked about the time when the tide flows out then that is the moment of truth to catch those swimming naked. In our case, the sudden drop in tourism revenue made us realize our vulnerability over this volatile sector. Our penchant for mass tourism as easy money must be restrained.

Certainly, the unregulated growth in bed stock hosting close to 3 million visitors in 2019 remained mostly idle for the past eighteen months whereas the trend for 2021 favours non regulated accommodation which saw 80% of travellers preferring the latter. Millions have been disbursed by Malta Enterprise to the hospitality sector during the past months in a generous furlough scheme that will end this year.

One hopes that none of the millions in recovery help were wasted in supporting zombie companies. A smart move was the use of about €220 million from the Development fund accumulated from proceeds of sale of passports.

The maintenance of low unemployment levels is a plus combined with the phenomenon that many foreign workers opted to leave and the process of finding replacements stalled or was made lengthier by the procedures to limit the spread of COVID-19. A bad omen in the horizon involves the shock to the fledgling financial services sector due to G20 and the European Union’s efforts towards corporate tax harmonisation across the bloc.

Moving on, in this analysis of pre-budget proposals one cannot omit to praise the intelligent use of Keynesian economics. This was manifested in a planned seven-year heavy investment in road network infrastructure which is a must for a small island.

All agree that the best mode of internal mobility is quintessential to ensure faster growth. Certainly, all suggestions made by the government and the Opposition need to be costed to see whether they are doable or otherwise some will end falling on infertile ground -treated as sheer publicity stunts.

The recent announcement of a €6.2 billion metro system spread over 20 years is an ambitious task that the administration is placing for public consultation and augurs well for an island to maximize efficiency in commuting and a partial reduction in the cacophony of motor vehicles.

Surely, linked to this ambitious project will be the alternative use of surplus excavation material which can be used to extend the shoreline as was the case with many islands such as in Dubai and Singapore. The future is bright and for once one can dream of extending the shoreline in Marsaxlokk - perhaps even contemplate building a secondary airport.

All this calls for careful planning so as to avoid the mistakes in previous planning decisions that attracted shark developers. Lessons learned from the misuse of millions squandered to develop the island as a Blockchain centre will guide us in our path how to expand digital prowess and for once set up an innovation center of repute.

A much-trumpeted Blockchain Island moniker which three years ago, the government portrayed as a new niche and cash cow has seen sluggish growth with the number of Virtual Financial Assets Agents growing by just 1 between the end of 2019 and 2020.

Furthermore, there was just 1 entity licensed as a Virtual Financial Assets Service Provider at the end of 2020. The contraction in the financial services industry is evident in terms of the number of licensed entities. This reflects weakness of promotion in the sector and flies in the face of what the government‘s Brexit team own achievement to attract new investment.

Forget the millions involved in a White Elephant that six years ago saw the pseudo dream of building a fully accredited American University - a mirage that saw very little progress and landed with its face down as a dumb squid.

Back to the pre-budget document coined by the PN, it waxes lyrical how our tax experts need to conduct a study on the potential impact of Corporate Tax harmonisation, with the need to establish mitigation measures and alternative solutions. All talk and no walk will not ensure that Malta remains a jurisdiction of choice for foreign investment.

Certainly, none of the two parties have bitten the bullet to reduce corporate tax which at 35% is the highest in Europe. Perhaps this partly explains why tax evasion is rampant and the shadow economy reaches a high of 26% of GDP- so we need to be pragmatic; a gradual reform is of no use.

Palliatives is what we have heard from various administrations in the past decade. It is time for surgery by our talented finance minister. Personal tax systems need to reflect advances in salary scales achieved in the various economic sectors.

Again, small and medium sized companies are forced to pay the same high rate as multinationals, when the latter avail themselves of lower rates due to legitimate tax refunds schemes. Finally, all agree about the imminent establishment of a centre of research and development run by professional (not party cronies) via tax incentives on transfer of pre-determined classes of intellectual property.

The future beckons and most are waiting with bated breath for the prime minister to trigger the starter gun for an election race.