FOI reactions to Budget 2007

The Malta Federation of Industry believes that the 2007 Budget is underpinned by a number of important priority areas, such as investment in human capital, an industrial policy, research and innovation and the drive to curb regulatory and...

This, together with tax relief being granted by Government, defines the 2007 Budget as a positive one. Nonetheless, the federation augurs that in the coming months Government pursues its strategy to undertake vital challenges, such as pension reform and the continuation of port reform.

More efforts are also required to ensure that good use is made of our limited resources and that economic growth hinges on a superior productivity performance.

The 2007 Budget gives us a good income tax package, enhanced social provisions, special relief on childcare services and school fees, measures to facilitate labour market participation and employability, some limited relief on administrative burdens on industry, especially SMEs, a Venture Capital Fund and increased capital spending.

At the same time, the Budget expects an increase of Lm19 million and Lm29 million in direct taxes and indirect taxes, respectively.

In this regard, the federation reiterates the need that increases in tax revenues should reflect stronger economic activity and a further curb on fiscal evasion rather than a higher tax burden. This is a crucial issue for the business community especially at a time when the productive sectors of the economy are still showing signs of strain.

Malta's economy is also heavily dependent on consumption expenditure, be it consumer spending and/or government expenditure. This scenario is not sustainable in terms of long-term growth. Productivity should become our main driver for growth, even because if people become more productive they contribute more through their taxes to public finances.

This concept should therefore remain at the heart of public policy making. In parallel, Government must ensure that measures favouring efficiency, research and innovation, lower administrative and regulatory burdens, and lifelong learning do reach their objectives.

With respect to administrative and regulatory burdens, the federation cannot but refer policymakers to two of its reports dealing with 'Government Induced Costs' and 'Controlling Over-Regulation'. These reports highlight the need for a timely corrective policy action by Government to foster a better operating environment for local business.

Industrial policy

Industrial policy is an important element in our strategy to foster economic growth and to enhance our productivity performance. The FOI is proud to have been directly involved in the process that led to the drafting of this policy document and looks forward to its implementation.

The policy identifies the country's strengths and weaknesses, and highlights areas of growth, such as healthcare, education services, creative industries, back office processing outsourcing, financial management services, consultancy, maritime activities and aviation.

The success of this policy will depend on how much and how fast we can ensure that these areas of growth are high on the agenda of our education institutions, that access to finance is better facilitated and that a culture of clustering is fostered.

Its success will also depend on how much we can eliminate over-regulation, how much support is given to SMEs through innovative public procurement procedures and on SMEs' take-up of research and innovation grants.

Education and research & innovation

The emphasis on training and education is welcome. However, we must achieve real change in this sector, which might not necessarily come about by increasing expenditure in the area. The limited resources of our small economy ask for a better use of funds in our efforts to become a knowledge economy.

At the same time, while everyone acknowledges the importance of the Venture Capital Fund to meet the target of boosting R&I activity, there seems to be a problem to get the initiative going given that it has already been launched in two other occasions.

Government must therefore ensure that the Venture Capital Fund really takes off in 2007. We cannot afford to lose more time.

Labour market participation and employability

Budget measures, such as the introduction of a flat rate of 10 per cent social security contributions on earnings from part-time work, the possibility for spouses working in the family business to register as an employee with the business, and the tax deduction in respect of childcare facilities, are good news. These are expected to have a positive effect on local labour market participation and the 'employability' of particular sections of the working age population, especially that of females.

Income tax relief

The income tax relief is welcome, if this really stimulates economic growth and dampens wage demands. The boost to disposable income could also lead to higher tax buoyancy.

Energy costs and alternative sources of energy

The 2007 Budget shows a lack of urgency in addressing high energy costs and alternative sources of energy. The 'Draft Renewal Energy Policy for Malta' published in conjunction with the pre-Budget 2007 document lists a number of commitments by Government in this area.

However, Budget 2007 does not back up these commitments with real action and long-term planning. Budget 2007 should have alleviated the impact of higher energy costs on businesses, especially micro and small enterprises, by introducing measures to promote energy efficiency.

In this regard, these enterprises should be provided with expert advice on how to achieve efficiency in electricity and water consumption.

Pensions reform

The notable rise in the cost of pensions over the years puts a strong responsibility on us all to act. However, the 2007 Budget does not address pension reform. Additional pension costs expected in the coming years should not force employers to pay higher contributions. This would further erode Malta's competitiveness and inevitably threaten employment.

Capital expenditure

The mobilisation of resources in important areas, such as waste management, industrial zones, tourist facilities, roads, and communications is more than welcome.

Inflation

Inflation has risen further in 2005 and is threatening competitiveness. Although declining oil prices might relieve some of the inflationary pressures, there is the risk that, once again, we could see our inflation head up, caused by a possible boost in disposable income due to the tax band relief and higher consumption levels in the run up to the euro, especially in the last months of 2007.