Provisos about VAT

When I first heard Prime Minister Lawrence Gonzi say it, I was, to put it mildly, astounded. There is no VAT on educational services, he proclaimed; nor does VAT impact on house purchases. At first, I thought it was just a throwaway line that he intended to nuance later with some deeper explication or a blanket proviso. But no, crudely and clearly, the Prime Minister meant what he said: VAT is not relevant in any way when citizens face mounting education and housing costs, he insisted.

Now along with colleagues, I had met in past months "ordinary" heads of households and people who run schools and other educational institutions. Among other matters, we discussed how better policies could be drafted to help them deliver better in the economic or social spheres where they are active. An issue that frequently arose dealt with the cost of delivery in education and with the financial problems that young couples face when they try to set up house for the first time: VAT was repeatedly named as a strong contributory factor. Yet, the Prime Minister (and Finance Minister) was denying the very existence of such an effect!

The punch line to his statement probably was that there is no VAT charged on the purchase of a house or when people pay school fees or "donations". It would need naïveté on a massive scale to believe that this surface situation covers the real problem. And Dr Gonzi is not naïve.

Yet, then, the PN propaganda machine moved into full gear to "exploit" this VAT issue. Their message was that I simply did not know what was going on, since, again they claimed and crowed, there is no VAT on educational services or housing. In moved the PN radio and TV media to drum home the point. There followed, repeating the same message, the usual gaggle of letter writers with a fast track for entry in the columns of the English language print media. (Their advantage in this game, where they send letters to the editor, usually written and coordinated by the same hand, is that while their contributions appear overnight, rebuttals from Labour spokesmen are delayed publication for weeks on end.)

At this stage it became evident that it was best to let this laughable campaign ride a bit more. The Prime Minister obliged, going on record once again with his statement that there is no VAT on education and housing. I believe that his side-kick at Finance, Parliamentary Secretary Tonio Fenech did likewise, presumably because he could not let his boss go out on a limb alone, even if he knew his facts better. Finally, in came the well known band of "independent" columnists primed to repeat the PN's propaganda message.

Does Dr Gonzi and his propaganda machine really believe that they can fool all the people all the time?

The facts are as follows. VAT at 18 per cent applies on such items necessary for schooling as uniforms, computers and related supplies, lab equipment, sports goods, and other goods used for and in classrooms and teaching facilities. On computers, an added 18 per cent is charged on the additional 14 per cent eco tax that is levied on these items. VAT applies at five per cent on such items as books, exercise books, colouring books, dictionaries and so on. VAT at 18 per cent applies on all supplies and services related to the maintenance and upkeep of schools, and shortly to all school construction.

It is obvious that there is a serious impact on the educational costs incurred directly by families and by schools. For the latter, this translates into less services provided by public schools (because their budget is eaten to the extent of 18 per cent by VAT) and translates into firmer or higher donations and fees as the case may be, for private Church schools and for private independent schools.

In housing, it is true that when you buy a house you do not pay VAT on the purchase but "only" a form of capital tax. However, the person selling the house to you will have, in constructing or repairing it, incurred VAT to the tune of 18 per cent. Naturally, the tax paid is reflected in the price he charges you for the house. If you are building your own home, then you will have to bear 18 per cent VAT on the full panoply of works carried out.

The Housing Authority recognises only in part the implications of this last situation. Against the presentation of audited fiscal receipts for works carried out on the construction of a first-time residence, it offers a lump sum payment of maximum Lm1,500 for a single person and of maximum Lm3,000 for a couple. (Why there should be this distinction between couples and singles, since the "subsidy" refers in both cases to a dwelling, remains a mystery.) However, you do not need to be a mathematical genius to understand how both those buying a house and others building it themselves find themselves even under this scheme far short of the VAT they will have paid.

So much for the notion that VAT is not chargeable and has no impact on educational services and on housing costs. Why then did Prime Minister Gonzi mount his absurd claim and try to swing on its basis a whole propaganda campaign? I think it was for this reason: The government needs to divert attention from the reality that its tax policies have increased mightily the burdens on middle-class families while inhibiting the economy's competitiveness. It was the president of the Federation of Industries who recently wrote in The Times that the government had attained its deficit targets largely by increasing taxes.

This cannot go on. It certainly does not improve matters to deny the truth, or to make provisos about VAT or other forms of taxation in order to fudge the truth. Labour in government will set as its priority the need to lighten those tax burdens on families and enterprises which insidiously contribute to price rises while reducing our competitiveness. In this sense, VAT on educational services and on housing constitutes a prime target.