Pre-budget deliberations (1)

In anticipation of the forthcoming Budget, the Malta Chamber of Commerce and Enterprise submitted to the Prime Minister and Minister of Finance an 11-page document outlining its detailed proposals last July. Furthermore, in recent weeks, it also reacted to government's pre-budget document.

In its earlier document, the chamber made its proposals within the framework of four principal objectives, namely:

Improving public debt and deficit positions to eventually enable lower tax burdens that would stimulate competitiveness and growth.

Safeguarding the other economic fundamentals to allow for Malta's euro adoption according to planned timeframes.

Stimulating economic momentum through fostering entrepreneurship, investment and export-led growth.

Striving towards a continuous enhancement process of national competitiveness in all areas of the economy and, in particular, ensuring the country is well prepared in terms of excellence in human capital and innovation to enable a smooth transition towards a knowledge-based economy.

We were pleased to note that the proposals made in July were largely reflected in the government's pre-budget document, which aims to consolidate public finances while enhancing economic momentum and competitiveness. The chamber noted the government's caution "that the measures presented cannot all be implemented in the forthcoming budget ..."

Consequently, in reacting to the government's pre-budget document, the chamber focused on the proposed measures relating to fiscal reform. In its July document, the chamber specifically stated it awaited the government's proposals for fiscal reform and submitted its own ideas in this regard. Indeed, tax reform is directly linked to achieving the chamber's outlined four objectives for the forthcoming budget.

Fiscal reform

The chamber was encouraged by the government's declared rationale behind the proposed fiscal reform - that of using the local taxation system as an instrument to encourage work and investment - hence the realisation of economic growth at the macro and micro levels. We had commented numerous times about the disincentive on investment and employment particularly when social security payments are included into the equation.

Streamlining company taxation

The chamber examined the proposed changes to company taxation through its Financial Service Economic Group (FSEG). It was encouraged by the fact that the pre-budget document recognised the distinction between company tax and "company rate of tax". It is the second that exists in Malta and the interchangeable use of terms in the past may have raised confusion.

It was further encouraging to the chamber and its FSEG in particular, that the government unequivocally declared throughout its document that these changes were "directed at maintaining our attractiveness as a foreign direct investment destination" and that it was being proposed that the present imputation tax system would be retained.

On the other hand, the document stated that "in principle these changes will not affect local residents or businesses (but are directed towards maintaining our attractiveness as foreign direct investment destination)". This is of concern to the chamber particularly in view of the data presented in the document showing that the overall tax burden rose from 28.3 per cent of GDP (in 2000) to 35.1 per cent in 2004 and Malta recorded the 11th highest tax burden out of the EU 25 countries.

A high tax burden is naturally not conducive to enhanced investment, high employment and strong competitiveness, leading to economic expansion.

The chamber again cautioned that the forthcoming budget must not send shockwaves or breed uncertainty in any sector of the economy. The business community cannot afford a repeat of situations of fiscal uncertainty as occurred in the past through budget measures announced with retroactive effect.

It was positive to note that our tax laws have been agreed to by the EU Commission and such endorsement provides confidence and security to the investor and to the operator. It also ensures that the financial services sector will continue to prosper and should in future contribute to a larger extent than the present 12 per cent of GDP.

It is important, however, that the country maintains economic and social stability for without these fundamental requirements the financial services industry will suffer.

Mr Galea is president of the Chamber of Commerce and Enterprise.

Tomorrow: Review of Income Tax Bands And Airport Taxes