Interview - Nudging the economy
The pre-budget document has pages and pages of measures, none of which are particularly dramatic. Parliamentary Secretary for finance Tonio Fenech explains that the idea was to make small adjustments that would nudge the economy in the right direction.
Let us start with what there isn't in the document: No reform of the stipend system considered by the Governor of the Central Bank to be unsustainable; no attempt to introduce charges for medicines.
The welfare state lives on. Were you simply too scared to touch it with an election coming up?
An evaluation showed that we need to retain the stipend system if we want to encourage young people to continue to tertiary education. I do not think the country should look at this short-sightedly as a cost but should see it as an investment. If people have a high level of education then you can compete as a knowledge-based economy. In fact, we introduced higher stipends for those sectors where we need to attract more students.
I think that concept is working and we are happy with the results.
With regards to health, four years ago, the government raised VAT from 15 per cent to 18 per cent precisely to be able to continue funding the health care system, which we knew was getting more expensive. However, government is still of the opinion that we should have free access to the health system and that there should not be barriers to entry to the health system as there are in the other countries.
You may ask whether we should rationalise the delivery of health care ... I think the pharmacy of your choice scheme is a push to control wastage. By making the relationship between the pharmacist and the patient more personal, we can avoid people taking pills that they do not need. And pharmacists will not be paid according to the value of the sale - they will get an annual dispensing fee per patient registered - so there is no incentive for them to give out unnecessary drugs.
A number of measures indicate that you prefer to reduce government expenditure by encouraging people to opt for private services through tax incentives - for private kindergartens and residential care for the elderly, for example...
This government has always been of the opinion that the private sector can play an important role in the social environment and that the government does not have to provide everything. Tax credits create more demand for private sector services, which has a positive economic effect, but it also helps us cope with demand for public services.
Plus the private sector is more efficient at providing some of these services... You can see this in the Mellieha home for the elderly, a private/public partnership, where construction is ahead of schedule.
A budget should reflect macro-economic adjustment but this one comes across as a list of micro-economic measures to win votes. Have you assessed the cost and benefits?
A budget is about the micro-economic measures that you have to take to reach the macroecomic targets, as established in the National Reform Programme.
In the last budget, we did a bit of carpet-bombing (like the income tax band reform) but you realise that certain sectors not participating in the labour market were not affected... So you have to see how to help, for example, to make people with disability more IT literate so they can find work. It may sound social but it is also economic.
Of the 60 measures in the social chapter, over 35 are economic, aimed at getting more people working. Government's idea is not to give hand-outs but to enable you to work, whether you are a single mother or an elderly person.
For example, we saw it did not make sense to restrict elderly people from working by saying that they cannot earn more than the minimum wage without losing their pension. Apart from helping them, more people work so the government gets more revenue and boosts the GDP.
Even the children's allowance issue has a macroeconomic rationale as our economy cannot grow - we cannot sustain our health system or our pension system - unless we have people working for us. You need families to have two or three children so you have to eliminate the discrimination of the first child being given 6 per cent and the second being given 3 per cent!
The university wants a clear commitment on its financing. You are offering tax incentives for donations from the private sector. Is that enough?
This is something the university asked for. We feel the university is not only a government responsibility but also a corporate one. Industry today is identifying areas where they need expertise and we want them to participate by funding the creation of it, in return for tax credits.
It does not mean we would not build an ICT faculty unless there were corporate funds to pay for it. We are committed to it and it has been approved by the university board. We cannot have a SmartCity but not an ICT faculty.
You have come up with the idea of fees for joint university degrees. Does it make sense to charge with one hand and give stipends with the other?
The vision of the university and the Rector is to seek partnerships with international universities via centres in Malta. It would be for postgraduate degrees, for which stipends are not paid.
These universities would not come here unless they can charge fees. We are willing to go down this route as at present we cannot offer these opportunities here and local students have to go abroad for these studies. Instead of giving scholarships, why don't we offer these courses here, at the same time attracting foreign students?
The document accepts that health professionals need adequate remuneration. It is quite worrying that around a third of the vacancies for doctors in health centres are vacant. You don't spell out what you intend to do...
There are discussions underway with the Medical Association of Malta and the Malta Union of Midwives and Nurses, which are very close to being finalised so it would not be prudent to say anything at this stage. However, government appreciates that we need to retain our people after investing so heavily in the educational system. It is very difficult to conceive that we will ever be able to match salaries overseas, especially in the UK, but we do need to tackle this.
There is a hint as to how this may be done. The document mentions the establishment of clinical targets. Is that how you are going to increase their remuneration without rocking the wage structure boat?
If we pay more, we must get more results. We need to address the issue of long queues and waiting lists, for example. The model will award performance.
Apart from offering subsidies for interest on loans for first-time buyers and the innovative private equity housing scheme, there are no signs of concern about the property market.
We are concerned but we are not an interventionist government. In the past, when governments tried to intervene, they made a mess of it and we are still suffering as a result as once done, things are very difficult to undo.
It cannot intervene, say, by setting prices as it would wreak havoc in the market, especially for those who have invested in property - which does not only mean speculators but even home owners, who may have a loan on that property. Imagine if you tried to reduce the price? You would just drive transactions underground and fuel the black economy.
So you have to find a way to make housing affordable and to reduce the inflationary impact by having a more competitive market. This is why we introduced the idea of equity sharing so you buy the share of the property that you can afford, renting the balance. We gave an incentive to the private sector by saying we would only charge 5 per cent tax on the rental income.
Only Lm30 million has so far been invested in the amnesty - the registration scheme. Do you suspect that a lot of the remaining Lm170 million has been spent on property?
I don't know but I can say that it has not yet gone into the banking system. Liquidity is still around Lm400 million. I don't know what people are waiting for... It could be that we overestimated the amount of cash that came from the black economy. People may feel that they have earned it legitimately and that they will not find problems when they come to exchange it to euro.
I can understand that they might not register money already deposited in the banks as it would be automatically converted (even though the tax authorities might jump on them when they used the money!). But with regards to cash, I cannot understand who is advising them to hang on to it.
There are some people who simply do not trust (commercial) banks and this is why we widened the remit so you can register it with the Central Bank.
It is not as though people bought property and then the vendor deposited the cash. The cash is still out there...
You are thinking of making the long-term unemployed work 30 hours on community projects. What has the reaction been?
At the first meeting of the Malta Council for Social and Economic Development, the response was very positive. It is an EU-funded scheme and will be an extension of the present Employment and Training Corporation ones; it is not some disciplinary work corps! The work will be related to their capacity - skills or physical - and it will help to integrate them into the workplace and to make a contribution.
It will also help us to address the issue of people registered on the unemployment list who are working. If they have to spend 30 hours doing this work, it will cut down on abuse.
The document also proposes the removal of transfer tax when the surviving spouse inherits their residence. What would this cost the government?
It would cost between Lm3-4 million. But the tax has created problems, particularly with old couples where the surviving spouse wants to remain in their home. Last year, we raised the threshold from Lm15,000 to Lm30,000 but we think it is time to remove it completely.
And I could not find the chapter on income tax bands...
We had an extensive chapter on tax reform last year. The policy is still there and does not need to be repeated in every pre-budget document. Will we be able to continue to change bands this year? That depends on the children's allowance issue and how aggressive we are and on what the other budget measures will cost. There is always some latitude but you have to decide how to use it.
A tax change usually has a significant impact. Last year, we estimated that it would cost us Lm12 million. In reality, the economy responded positively and in the first six months, revenue increased so we were actually Lm15 million above budget. Some is related to the fact that businesses are declaring more but there is also competition in the labour market and people are negotiating higher wages which means higher taxes.
We have the lowest unemployment rate in years, with 5,700 people on Part One of the register. This also contributes fiscally.
We will have to see how things are closer to the budget but our first priorities are those laid out in this document. It does not mean that the government will not do other things...
But last year the adjustment of tax bands created some injustices. If both spouses work but have no children, they get a Lm7,000 tax free bracket between them. A couple with two children benefit the same way - but shared between four people. We felt that this is not fair if we want to encourage people to have more children. This can be done through children's allowance but there is another way: You could give a tax credit for every child as they do in the UK. This is where we want to see debate.
And finally, what will happen between now and the actual budget. I understand you already made a presentation to MCESD.
We will have another meeting in September by when they will have had time to prepare their feedback and send it to us.
In the meantime, we will hold consultation meetings in September for sectors like youth, sports and culture, and women, as well as for the public.
What's in it for you...
There are 252 measures proposed in the pre-budget document, all based on the theme of making families grow stronger. Some affect emarginated or small groups; others are more wide-ranging. These are some of the most relevant measures being considered:
• Review of transfer tax paid by surviving spouse inheriting residence
• Removal of cap on earnings by pensioners, without loss of pension rights
• Interest subsidies on house loans for first-time buyers meeting certain criteria, when interest rates exceed four per cent
• A children's allowance to families with an income over the threshold in certain circumstances
• Tax credits for parents who send their children to private kindergartens
• Tax credits for the elderly who opt for private residential care
• 30 hours per week mandatory public sector/community work for very long-term unemployed
• Choice for employers to pay half or 10 per cent of minimum social security contributions for part-time employees (over eight but under 20 hours)
• Credit for national insurance contributions by the self-employed during the first year of business
• More rigorous enforcement of obligation for companies employing over 20 to take on persons with disability - or pay contribution to a fund to help them get work
• Six-month employability programme for early school leavers
• Introduction of register for unemployed seeking part-time work
• Measures to remove disincentives to work for single parents receiving benefits
• Fairer tax thresholds for separated spouse paying maintenance for child/ren
• Incentives for private housing equity share scheme (part owned, part rented)
• Trust fund to attract donations to University of Malta from individuals or companies
• A public service obligation contract to sustain an air transport service to Gozo
• Tax rebate for participation by children in approved physical activity programme.
The welfare state lives on. Were you simply too scared to touch it with an election coming up?
An evaluation showed that we need to retain the stipend system if we want to encourage young people to continue to tertiary education. I do not think the country should look at this short-sightedly as a cost but should see it as an investment. If people have a high level of education then you can compete as a knowledge-based economy. In fact, we introduced higher stipends for those sectors where we need to attract more students.
I think that concept is working and we are happy with the results.
With regards to health, four years ago, the government raised VAT from 15 per cent to 18 per cent precisely to be able to continue funding the health care system, which we knew was getting more expensive. However, government is still of the opinion that we should have free access to the health system and that there should not be barriers to entry to the health system as there are in the other countries.
You may ask whether we should rationalise the delivery of health care ... I think the pharmacy of your choice scheme is a push to control wastage. By making the relationship between the pharmacist and the patient more personal, we can avoid people taking pills that they do not need. And pharmacists will not be paid according to the value of the sale - they will get an annual dispensing fee per patient registered - so there is no incentive for them to give out unnecessary drugs.
A number of measures indicate that you prefer to reduce government expenditure by encouraging people to opt for private services through tax incentives - for private kindergartens and residential care for the elderly, for example...
This government has always been of the opinion that the private sector can play an important role in the social environment and that the government does not have to provide everything. Tax credits create more demand for private sector services, which has a positive economic effect, but it also helps us cope with demand for public services.
Plus the private sector is more efficient at providing some of these services... You can see this in the Mellieha home for the elderly, a private/public partnership, where construction is ahead of schedule.
A budget should reflect macro-economic adjustment but this one comes across as a list of micro-economic measures to win votes. Have you assessed the cost and benefits?
A budget is about the micro-economic measures that you have to take to reach the macroecomic targets, as established in the National Reform Programme.
In the last budget, we did a bit of carpet-bombing (like the income tax band reform) but you realise that certain sectors not participating in the labour market were not affected... So you have to see how to help, for example, to make people with disability more IT literate so they can find work. It may sound social but it is also economic.
Of the 60 measures in the social chapter, over 35 are economic, aimed at getting more people working. Government's idea is not to give hand-outs but to enable you to work, whether you are a single mother or an elderly person.
For example, we saw it did not make sense to restrict elderly people from working by saying that they cannot earn more than the minimum wage without losing their pension. Apart from helping them, more people work so the government gets more revenue and boosts the GDP.
Even the children's allowance issue has a macroeconomic rationale as our economy cannot grow - we cannot sustain our health system or our pension system - unless we have people working for us. You need families to have two or three children so you have to eliminate the discrimination of the first child being given 6 per cent and the second being given 3 per cent!
The university wants a clear commitment on its financing. You are offering tax incentives for donations from the private sector. Is that enough?
This is something the university asked for. We feel the university is not only a government responsibility but also a corporate one. Industry today is identifying areas where they need expertise and we want them to participate by funding the creation of it, in return for tax credits.
It does not mean we would not build an ICT faculty unless there were corporate funds to pay for it. We are committed to it and it has been approved by the university board. We cannot have a SmartCity but not an ICT faculty.
You have come up with the idea of fees for joint university degrees. Does it make sense to charge with one hand and give stipends with the other?
The vision of the university and the Rector is to seek partnerships with international universities via centres in Malta. It would be for postgraduate degrees, for which stipends are not paid.
These universities would not come here unless they can charge fees. We are willing to go down this route as at present we cannot offer these opportunities here and local students have to go abroad for these studies. Instead of giving scholarships, why don't we offer these courses here, at the same time attracting foreign students?
The document accepts that health professionals need adequate remuneration. It is quite worrying that around a third of the vacancies for doctors in health centres are vacant. You don't spell out what you intend to do...
There are discussions underway with the Medical Association of Malta and the Malta Union of Midwives and Nurses, which are very close to being finalised so it would not be prudent to say anything at this stage. However, government appreciates that we need to retain our people after investing so heavily in the educational system. It is very difficult to conceive that we will ever be able to match salaries overseas, especially in the UK, but we do need to tackle this.
There is a hint as to how this may be done. The document mentions the establishment of clinical targets. Is that how you are going to increase their remuneration without rocking the wage structure boat?
If we pay more, we must get more results. We need to address the issue of long queues and waiting lists, for example. The model will award performance.
Apart from offering subsidies for interest on loans for first-time buyers and the innovative private equity housing scheme, there are no signs of concern about the property market.
We are concerned but we are not an interventionist government. In the past, when governments tried to intervene, they made a mess of it and we are still suffering as a result as once done, things are very difficult to undo.
It cannot intervene, say, by setting prices as it would wreak havoc in the market, especially for those who have invested in property - which does not only mean speculators but even home owners, who may have a loan on that property. Imagine if you tried to reduce the price? You would just drive transactions underground and fuel the black economy.
So you have to find a way to make housing affordable and to reduce the inflationary impact by having a more competitive market. This is why we introduced the idea of equity sharing so you buy the share of the property that you can afford, renting the balance. We gave an incentive to the private sector by saying we would only charge 5 per cent tax on the rental income.
Only Lm30 million has so far been invested in the amnesty - the registration scheme. Do you suspect that a lot of the remaining Lm170 million has been spent on property?
I don't know but I can say that it has not yet gone into the banking system. Liquidity is still around Lm400 million. I don't know what people are waiting for... It could be that we overestimated the amount of cash that came from the black economy. People may feel that they have earned it legitimately and that they will not find problems when they come to exchange it to euro.
I can understand that they might not register money already deposited in the banks as it would be automatically converted (even though the tax authorities might jump on them when they used the money!). But with regards to cash, I cannot understand who is advising them to hang on to it.
There are some people who simply do not trust (commercial) banks and this is why we widened the remit so you can register it with the Central Bank.
It is not as though people bought property and then the vendor deposited the cash. The cash is still out there...
You are thinking of making the long-term unemployed work 30 hours on community projects. What has the reaction been?
At the first meeting of the Malta Council for Social and Economic Development, the response was very positive. It is an EU-funded scheme and will be an extension of the present Employment and Training Corporation ones; it is not some disciplinary work corps! The work will be related to their capacity - skills or physical - and it will help to integrate them into the workplace and to make a contribution.
It will also help us to address the issue of people registered on the unemployment list who are working. If they have to spend 30 hours doing this work, it will cut down on abuse.
The document also proposes the removal of transfer tax when the surviving spouse inherits their residence. What would this cost the government?
It would cost between Lm3-4 million. But the tax has created problems, particularly with old couples where the surviving spouse wants to remain in their home. Last year, we raised the threshold from Lm15,000 to Lm30,000 but we think it is time to remove it completely.
And I could not find the chapter on income tax bands...
We had an extensive chapter on tax reform last year. The policy is still there and does not need to be repeated in every pre-budget document. Will we be able to continue to change bands this year? That depends on the children's allowance issue and how aggressive we are and on what the other budget measures will cost. There is always some latitude but you have to decide how to use it.
A tax change usually has a significant impact. Last year, we estimated that it would cost us Lm12 million. In reality, the economy responded positively and in the first six months, revenue increased so we were actually Lm15 million above budget. Some is related to the fact that businesses are declaring more but there is also competition in the labour market and people are negotiating higher wages which means higher taxes.
We have the lowest unemployment rate in years, with 5,700 people on Part One of the register. This also contributes fiscally.
We will have to see how things are closer to the budget but our first priorities are those laid out in this document. It does not mean that the government will not do other things...
But last year the adjustment of tax bands created some injustices. If both spouses work but have no children, they get a Lm7,000 tax free bracket between them. A couple with two children benefit the same way - but shared between four people. We felt that this is not fair if we want to encourage people to have more children. This can be done through children's allowance but there is another way: You could give a tax credit for every child as they do in the UK. This is where we want to see debate.
And finally, what will happen between now and the actual budget. I understand you already made a presentation to MCESD.
We will have another meeting in September by when they will have had time to prepare their feedback and send it to us.
In the meantime, we will hold consultation meetings in September for sectors like youth, sports and culture, and women, as well as for the public.
What's in it for you...
There are 252 measures proposed in the pre-budget document, all based on the theme of making families grow stronger. Some affect emarginated or small groups; others are more wide-ranging. These are some of the most relevant measures being considered:
• Review of transfer tax paid by surviving spouse inheriting residence
• Removal of cap on earnings by pensioners, without loss of pension rights
• Interest subsidies on house loans for first-time buyers meeting certain criteria, when interest rates exceed four per cent
• A children's allowance to families with an income over the threshold in certain circumstances
• Tax credits for parents who send their children to private kindergartens
• Tax credits for the elderly who opt for private residential care
• 30 hours per week mandatory public sector/community work for very long-term unemployed
• Choice for employers to pay half or 10 per cent of minimum social security contributions for part-time employees (over eight but under 20 hours)
• Credit for national insurance contributions by the self-employed during the first year of business
• More rigorous enforcement of obligation for companies employing over 20 to take on persons with disability - or pay contribution to a fund to help them get work
• Six-month employability programme for early school leavers
• Introduction of register for unemployed seeking part-time work
• Measures to remove disincentives to work for single parents receiving benefits
• Fairer tax thresholds for separated spouse paying maintenance for child/ren
• Incentives for private housing equity share scheme (part owned, part rented)
• Trust fund to attract donations to University of Malta from individuals or companies
• A public service obligation contract to sustain an air transport service to Gozo
• Tax rebate for participation by children in approved physical activity programme.