Clear and present danger?
The government has managed to boost the local economy while at the same time getting its financial house in order. But what happens next could build on the past or undo the good work. Vanessa Macdonald pressed Finance Minister Tonio Fenech to explain...
The government has managed to boost the local economy while at the same time getting its financial house in order. But what happens next could build on the past or undo the good work. Vanessa Macdonald pressed Finance Minister Tonio Fenech to explain the strategy.
You've won the election and don't need to worry any more about Labour pinching your ideas. Now you can tell us about the calculations behind the tax cuts...
(Laughs) We are already working on the pre-budget document which we want to have ready by mid-June, end of July latest.
I can show you the workings but these are calculated on a line by line basis, not using econometric models as such. We are pretty confident about the calculations, even with regards to the losses that would be incurred at present income levels - estimated to be €42-46 million (Lm18-20 million). How much you recoup of that (through increased spending) depends very much on the growth rates expected. Last year was a very good year and we closed the last quarter at 4.3 per cent, very high. We should close at close to 4 per cent for the whole of 2007.
We started 2008 quite well with tourism and manufacturing looking good, with high employment and low unemployment, so revenue looks good. Of course, it is too early to make forecasts for the whole year. There are cost areas that we need to control. But I am fairly confident that we will start implementing parts of our electoral programme in the next budget.
Obviously, there are also pressing tax issues which we are addressing, because of the realities of the EU. We have to push these forward, perhaps more than we would have liked.
There are also circumstances in the world economy that we are not very happy about: We could see the clouds even before the election, such as the price of oil, which shows no indication of going down. The recession in the US is happening and there is still a crisis in the financial markets. All these uncertainties mean we have to be cautious and make sure that we can sustain current economic growth.
What if the signs are not auspicious? Will you still go ahead with the tax cuts?
We have always said that all decisions taken, including fiscal ones, will be taken in the light of our commitment to have a budget surplus by 2010. This will be taken into consideration.
Part of the tax cuts were directed at spurring more economic growth...
Some economists are questioning the impact of more disposable income on economic growth... especially since so much money is spent on imported white goods.
One has to look at how the tax reform is carried out. We are not proposing to do it in one go, as that would not create the stability that we are looking for and could jeopardise the whole programme.
We believe that the reduction of the 35 per cent rate to 25 per cent (on income that does not exceed €60,000) will generate wealth through investment and employment among small and medium-sized enterprises as they will grow their business if they get more of a return for their effort. Consumption will only increase if income tax levels are changed to increase disposable income rather than to encourage investment.
There are different tax bands for different levels of personal income but not for corporate profits. Would it make sense? Perhaps it would be a way of taxing companies that make huge profits without the adverse reactions that a windfall tax would bring...
The government has no intention of changing our corporate tax system. First of all, our full imputation system means that tax is charged on income only once, so even if I charge provisional tax, it is technically refunded to the shareholder and re-taxed according to the rate paid by the shareholder.
In fact, we have many pensioners who receive dividends from listed companies who are then able to reclaim the tax paid by the bank on that portion of the dividend, as a deduction against their total tax charge for the year.
Two years ago, our taxation system got the seal of approval from the EU. Changing it would significantly jeopardise growth prospects for foreign direct investment, particularly in financial services, a very fast growing sector which is employing a lot of people. It is also generating considerable tax returns for the government. I think if we were to change the system, we could jeopardise this.
For example, AD proposed a 40 per cent tax on banks, which I completely disagree with. Banks are a growing sector with both local and international business. If we did as AD suggested, banks would leave the island and move to more tax efficient jurisdictions.
You cannot use simple mathematics - if someone is generating big profits, take a bigger cut - to run an economy.
We have always been very averse to windfall taxes. Some countries have applied windfall taxes but it is a temporary measure to fill coffers which does not provide stability. The word spreads very fast and international markets would start saying that you cannot trust the Maltese government. I don't think it is the best way to enhance our international credibility.
We were talking about boosting disposable income and encouraging people to invest. If you can afford to give tax cuts, why can't you afford to introduce second and third pillar pensions? If you don't think ahead for the future, how can you expect people to?
This is a debate that is underway internally... We always said that the second pillar could not be introduced when there was low economic growth. Now we are actively discussing it, together with the Social Policy Ministry, with a potential to take some more concrete decisions this year.
I and Social Policy Minister John Dalli agree that now is the time to see if there is any decision to be taken, particularly on the second pillar, as the third pillar will then just follow naturally.
We will have to leave you a bit curious as to whether you will find it in the pre-budget document.
I am not as convinced as you are that we have to sort out the second pillar pension before you introduce the third... All the products are there already. The only thing missing are the fiscal incentives.
I appreciate that banks have created the products and so they are anxious to place them on the market as soon as possible. They would probably prefer it if there were no second pillar and people were just incentivised to go to the third pillar.
There are pros and cons. If we feel that the first pillar is sufficiently adequate, then yes, we should just go for the third pillar as we will not need to impose the second pillar scheme.
However, if the review establishes that the second pillar pension is required and needs to be introduced in a mandatory manner, then individuals who have been incentivised to go for the third pillar pension will find the disposable income reduced significantly. This is especially important because although the economy is growing, there is higher inflation already putting pressure on their disposable income. This in turn causes wage pressures.
The third pillar will be people paying extra into a specific fund from which they then take a return upon retirement age.
Adding a compulsory second pillar cost to individuals and employers is not an easy decision to take when you need to keep a competitive edge. There are a lot of things to balance before you take a decision - not just whether the banks want to get on with their own business.
We have an estimated 70,000 vacant properties on the market (based on the Census and construction in the ensuing two years). Prices in some segments of the market have started to fall. Real estate agents have started to offer discounts. Aren't you worried about this economic sector?
It has long been expected that the property market will pass through a phase of readjustment. And that is not bad. The only thing that the government can do is ensure that the market operates effectively and that there is adequate supply to meet demand or, if the prices are getting too high, that there is excess supply which can help to readjust the prices downwards.
So to me this is good news for buyers. It may not be great news to people who have been hoarding property for a long time but in reality, a readjustment - not a significant one but the slight one that seems to be happening - within an economy is also healthy.
It will also encourage people to invest differently, rather than in property. We need to look at other sectors of our economy that can give growth.
For example, developers are still too busy building apartments. This economy is growing into a service-oriented economy which requires sorely-lacking office space. We have online gaming companies who have been given a licence and who want to come onstream but who cannot find office space.
We intend to carry out a study with the Malta Environment and Planning Authority on better planning for office space in this country. Mepa does not allow private residences to be converted to offices. In my opinion, this is wrong as if we agree that we have excess residences, then what is wrong with spreading work around the island? Why should we congest all office space in one place and then complain about parking and traffic? Why not go into localities and use these large homes, which are a temptation for developers, as offices for e-gaming companies? Would it disturb the neighbours? I don't think so.
I think it would reduce congestion and allow people to find work nearer to their own homes, making the life-work balance much easier.
When we talk about property, we talk about the buyers and sellers. What about the construction industry? If things slow down, as they must, what will happen to all the cranes and bathroom showrooms and tilers?
There are some significant projects still coming up which will keep the industry busy, such as SmartCity. Also, with EU funding new opportunities coming onstream, such as the restoration of the bastions, there are major opportunity for companies to take part in projects which add more value to the economy than just creating residences.
Developers should also look better at the new opportunities being created by the ICT sector, the financial services sector and new emerging sectors. So in the end our resources will be better used.
You've taken over government investments and privatisation. So, what's for sale?
We are now moving on the two major diverstments within Enemalta, of LPG gas and the petroleum division, the former being at a more advanced stage.
Obviously there are other projects being considered for privatisation but it is too early to say.
Is Bank of Valletta still up for sale?
It would be crazy to sell BOV at a time when the markets are responding so negatively to the banking sector.
The Malta Stock Exchange had a number of proposals waiting for a minister to be appointed. What now?
The MSE is an operator and not a regulator. It is a standard principle that the government should not be a direct operator but should only regulate and facilitate business, so it is clearly not the government's vocation to hold on to the MSE indefinitely. But before we actually move towards privatisation, there are wider issues to consider. First of all, I believe we need its activity levels to grow a bit more. I think chairman Joe Zammit Tabona has done a marvellous job of rekindling interest in the Exchange and a lot of activity has come onstream.
This is what will interest private investors or other exchanges - we would like to see the Exchange become part of a network, to see foreign listings come to Malta and vice-versa, as this would really help us integrate with the EU.
We have already had people knocking at our door but I think we should be more strategic and give value to the Exchange before selling.
Malta Enterprise is back in the Finance Minister's portfolio - but there is no mention of Malta Industrial Parks. What plans do you have for both?
Both are part of my portfolio. They will continue to play a critical role in attracting both foreign direct investment and investment locally. The government has set out a vision with six areas of priority in which we would like to see Malta excel by 2015. ME will play a key role in a number of these sectors, even financial services, where other entities are doing a great job. Financial services companies can bring back office jobs which ME would then support. ME will play an important role in fostering higher value-added manufacturing and service-oriented industries.
ME needs to look ahead. For example, the pharmaceutical industry is doing very well and we have to continue promoting it. The back-office sector needs to be promoted as there is a lot of growth. There is also a lot of interest in manufacturing but we need to support local industry as it can give us more permanent growth with more loyalty in today's realities. We also need to re-think and strengthen ME's role in SMEs. The unit remained within ME but was spread between two ministries; it is now back under the same ministry as ME.
Small businesses could become the larger industries of the future. Even at European level, it is clear that small businesses have the potential and tendency to become the medium-sized businesses of tomorrow.
Why not take up opportunities already here instead of going round the world to find companies to employ 50 or 100 people in the future?
A common complaint is the lack of human resources, with certain sectors stealing the limelight and leaving others scrabbling to recruit. Are you going to consider a "blue card", as mentioned in the ICT strategy?
We never closed the door to foreign workers in sectors where we need growth. They help to develop sectors and promote cross-fertilisation through their knowledge and experience. Obviously, we want to see the first opportunities going to the Maltese but in certain sectors we are feeling the pressure. If we want to sustain growth, we should not limit opportunities for foreigners to work here. They actually leave economic benefits - even if you see them as long-term tourists! And they train people and pass on experience that they might have.
They also create more jobs for Maltese who are not after higher-end jobs. They employ gardeners and cleaners and maintenance workers. All this is important for the economy.
We are producing more accountants but we are already stretched. The Maltese are excellent but they are not the only ones who are. Look at the international financial sector and you will realise that there are a lot of people working there who are not native.
You've won the election and don't need to worry any more about Labour pinching your ideas. Now you can tell us about the calculations behind the tax cuts...
(Laughs) We are already working on the pre-budget document which we want to have ready by mid-June, end of July latest.
I can show you the workings but these are calculated on a line by line basis, not using econometric models as such. We are pretty confident about the calculations, even with regards to the losses that would be incurred at present income levels - estimated to be €42-46 million (Lm18-20 million). How much you recoup of that (through increased spending) depends very much on the growth rates expected. Last year was a very good year and we closed the last quarter at 4.3 per cent, very high. We should close at close to 4 per cent for the whole of 2007.
We started 2008 quite well with tourism and manufacturing looking good, with high employment and low unemployment, so revenue looks good. Of course, it is too early to make forecasts for the whole year. There are cost areas that we need to control. But I am fairly confident that we will start implementing parts of our electoral programme in the next budget.
Obviously, there are also pressing tax issues which we are addressing, because of the realities of the EU. We have to push these forward, perhaps more than we would have liked.
There are also circumstances in the world economy that we are not very happy about: We could see the clouds even before the election, such as the price of oil, which shows no indication of going down. The recession in the US is happening and there is still a crisis in the financial markets. All these uncertainties mean we have to be cautious and make sure that we can sustain current economic growth.
What if the signs are not auspicious? Will you still go ahead with the tax cuts?
We have always said that all decisions taken, including fiscal ones, will be taken in the light of our commitment to have a budget surplus by 2010. This will be taken into consideration.
Part of the tax cuts were directed at spurring more economic growth...
Some economists are questioning the impact of more disposable income on economic growth... especially since so much money is spent on imported white goods.
One has to look at how the tax reform is carried out. We are not proposing to do it in one go, as that would not create the stability that we are looking for and could jeopardise the whole programme.
We believe that the reduction of the 35 per cent rate to 25 per cent (on income that does not exceed €60,000) will generate wealth through investment and employment among small and medium-sized enterprises as they will grow their business if they get more of a return for their effort. Consumption will only increase if income tax levels are changed to increase disposable income rather than to encourage investment.
There are different tax bands for different levels of personal income but not for corporate profits. Would it make sense? Perhaps it would be a way of taxing companies that make huge profits without the adverse reactions that a windfall tax would bring...
The government has no intention of changing our corporate tax system. First of all, our full imputation system means that tax is charged on income only once, so even if I charge provisional tax, it is technically refunded to the shareholder and re-taxed according to the rate paid by the shareholder.
In fact, we have many pensioners who receive dividends from listed companies who are then able to reclaim the tax paid by the bank on that portion of the dividend, as a deduction against their total tax charge for the year.
Two years ago, our taxation system got the seal of approval from the EU. Changing it would significantly jeopardise growth prospects for foreign direct investment, particularly in financial services, a very fast growing sector which is employing a lot of people. It is also generating considerable tax returns for the government. I think if we were to change the system, we could jeopardise this.
For example, AD proposed a 40 per cent tax on banks, which I completely disagree with. Banks are a growing sector with both local and international business. If we did as AD suggested, banks would leave the island and move to more tax efficient jurisdictions.
You cannot use simple mathematics - if someone is generating big profits, take a bigger cut - to run an economy.
We have always been very averse to windfall taxes. Some countries have applied windfall taxes but it is a temporary measure to fill coffers which does not provide stability. The word spreads very fast and international markets would start saying that you cannot trust the Maltese government. I don't think it is the best way to enhance our international credibility.
We were talking about boosting disposable income and encouraging people to invest. If you can afford to give tax cuts, why can't you afford to introduce second and third pillar pensions? If you don't think ahead for the future, how can you expect people to?
This is a debate that is underway internally... We always said that the second pillar could not be introduced when there was low economic growth. Now we are actively discussing it, together with the Social Policy Ministry, with a potential to take some more concrete decisions this year.
I and Social Policy Minister John Dalli agree that now is the time to see if there is any decision to be taken, particularly on the second pillar, as the third pillar will then just follow naturally.
We will have to leave you a bit curious as to whether you will find it in the pre-budget document.
I am not as convinced as you are that we have to sort out the second pillar pension before you introduce the third... All the products are there already. The only thing missing are the fiscal incentives.
I appreciate that banks have created the products and so they are anxious to place them on the market as soon as possible. They would probably prefer it if there were no second pillar and people were just incentivised to go to the third pillar.
There are pros and cons. If we feel that the first pillar is sufficiently adequate, then yes, we should just go for the third pillar as we will not need to impose the second pillar scheme.
However, if the review establishes that the second pillar pension is required and needs to be introduced in a mandatory manner, then individuals who have been incentivised to go for the third pillar pension will find the disposable income reduced significantly. This is especially important because although the economy is growing, there is higher inflation already putting pressure on their disposable income. This in turn causes wage pressures.
The third pillar will be people paying extra into a specific fund from which they then take a return upon retirement age.
Adding a compulsory second pillar cost to individuals and employers is not an easy decision to take when you need to keep a competitive edge. There are a lot of things to balance before you take a decision - not just whether the banks want to get on with their own business.
We have an estimated 70,000 vacant properties on the market (based on the Census and construction in the ensuing two years). Prices in some segments of the market have started to fall. Real estate agents have started to offer discounts. Aren't you worried about this economic sector?
It has long been expected that the property market will pass through a phase of readjustment. And that is not bad. The only thing that the government can do is ensure that the market operates effectively and that there is adequate supply to meet demand or, if the prices are getting too high, that there is excess supply which can help to readjust the prices downwards.
So to me this is good news for buyers. It may not be great news to people who have been hoarding property for a long time but in reality, a readjustment - not a significant one but the slight one that seems to be happening - within an economy is also healthy.
It will also encourage people to invest differently, rather than in property. We need to look at other sectors of our economy that can give growth.
For example, developers are still too busy building apartments. This economy is growing into a service-oriented economy which requires sorely-lacking office space. We have online gaming companies who have been given a licence and who want to come onstream but who cannot find office space.
We intend to carry out a study with the Malta Environment and Planning Authority on better planning for office space in this country. Mepa does not allow private residences to be converted to offices. In my opinion, this is wrong as if we agree that we have excess residences, then what is wrong with spreading work around the island? Why should we congest all office space in one place and then complain about parking and traffic? Why not go into localities and use these large homes, which are a temptation for developers, as offices for e-gaming companies? Would it disturb the neighbours? I don't think so.
I think it would reduce congestion and allow people to find work nearer to their own homes, making the life-work balance much easier.
When we talk about property, we talk about the buyers and sellers. What about the construction industry? If things slow down, as they must, what will happen to all the cranes and bathroom showrooms and tilers?
There are some significant projects still coming up which will keep the industry busy, such as SmartCity. Also, with EU funding new opportunities coming onstream, such as the restoration of the bastions, there are major opportunity for companies to take part in projects which add more value to the economy than just creating residences.
Developers should also look better at the new opportunities being created by the ICT sector, the financial services sector and new emerging sectors. So in the end our resources will be better used.
You've taken over government investments and privatisation. So, what's for sale?
We are now moving on the two major diverstments within Enemalta, of LPG gas and the petroleum division, the former being at a more advanced stage.
Obviously there are other projects being considered for privatisation but it is too early to say.
Is Bank of Valletta still up for sale?
It would be crazy to sell BOV at a time when the markets are responding so negatively to the banking sector.
The Malta Stock Exchange had a number of proposals waiting for a minister to be appointed. What now?
The MSE is an operator and not a regulator. It is a standard principle that the government should not be a direct operator but should only regulate and facilitate business, so it is clearly not the government's vocation to hold on to the MSE indefinitely. But before we actually move towards privatisation, there are wider issues to consider. First of all, I believe we need its activity levels to grow a bit more. I think chairman Joe Zammit Tabona has done a marvellous job of rekindling interest in the Exchange and a lot of activity has come onstream.
This is what will interest private investors or other exchanges - we would like to see the Exchange become part of a network, to see foreign listings come to Malta and vice-versa, as this would really help us integrate with the EU.
We have already had people knocking at our door but I think we should be more strategic and give value to the Exchange before selling.
Malta Enterprise is back in the Finance Minister's portfolio - but there is no mention of Malta Industrial Parks. What plans do you have for both?
Both are part of my portfolio. They will continue to play a critical role in attracting both foreign direct investment and investment locally. The government has set out a vision with six areas of priority in which we would like to see Malta excel by 2015. ME will play a key role in a number of these sectors, even financial services, where other entities are doing a great job. Financial services companies can bring back office jobs which ME would then support. ME will play an important role in fostering higher value-added manufacturing and service-oriented industries.
ME needs to look ahead. For example, the pharmaceutical industry is doing very well and we have to continue promoting it. The back-office sector needs to be promoted as there is a lot of growth. There is also a lot of interest in manufacturing but we need to support local industry as it can give us more permanent growth with more loyalty in today's realities. We also need to re-think and strengthen ME's role in SMEs. The unit remained within ME but was spread between two ministries; it is now back under the same ministry as ME.
Small businesses could become the larger industries of the future. Even at European level, it is clear that small businesses have the potential and tendency to become the medium-sized businesses of tomorrow.
Why not take up opportunities already here instead of going round the world to find companies to employ 50 or 100 people in the future?
A common complaint is the lack of human resources, with certain sectors stealing the limelight and leaving others scrabbling to recruit. Are you going to consider a "blue card", as mentioned in the ICT strategy?
We never closed the door to foreign workers in sectors where we need growth. They help to develop sectors and promote cross-fertilisation through their knowledge and experience. Obviously, we want to see the first opportunities going to the Maltese but in certain sectors we are feeling the pressure. If we want to sustain growth, we should not limit opportunities for foreigners to work here. They actually leave economic benefits - even if you see them as long-term tourists! And they train people and pass on experience that they might have.
They also create more jobs for Maltese who are not after higher-end jobs. They employ gardeners and cleaners and maintenance workers. All this is important for the economy.
We are producing more accountants but we are already stretched. The Maltese are excellent but they are not the only ones who are. Look at the international financial sector and you will realise that there are a lot of people working there who are not native.