STM and the Budget (2) - Reappraising revenue and expenditure
In considering what investment aid package to offer to the troubled STM giant, the government has another restricting parameter to grapple - its financial situation. The government is committed to balance the budget by up to 2010. It is confident that...
In considering what investment aid package to offer to the troubled STM giant, the government has another restricting parameter to grapple - its financial situation. The government is committed to balance the budget by up to 2010. It is confident that it is on the right track. Still, already there are visible pitfalls along the way. Some of these have been created by the government itself, through the way it has reduced income tax rates in the last two budgets, even after netting out the earlier increase in the top VAT rate to 18 per cent. The authorities have found comfort in the fact that income tax has continued to increase, notwithstanding the cut in rates. That was due to a high rate of economic growth, not least in nominal terms, which is the relevant measurement here.
Growth in the first quarter has maintained the trend, and a rising rate of inflation will have the ironical effect of boosting the government's nominal tax take. But, it would be foolhardy not to recognise that the future threatens. It does so in the first instance because of the turbulence in the economies upon which Malta depends for its main export markets. That turbulence is not restricted to the global credit crunch, regarding which the worse may be over. Nor is currency volatility the end of it. Such volatility does not arise in the eurozone, which absorbs a huge chunk of our exports and where there is no currency implication now that we are also members of it.
The negative outlook lies in the probability that economic activity will slow down, both in the eurozone as well as in our dollar and sterling markets. This is not a doom scenario. Nevertheless it would be a very brave or senseless person indeed who does not recognise that it is one of unavoidable gloom.
That gloom becomes accentuated when one turns to the import side. Whatever our level of exports the material input required for it has to be imported, as has the largest chunk of our domestic consumption. In each case we are facing higher supply prices. The most obvious lie in the soaring price of crude oil and cereals, but watch out for their knock-on effects. These are already being felt, and more lies in store, even as food prices fluctuate around record levels.
The government may tighten up its act and focus more on deterring domestic price increases which are not inevitably related to higher imported and domestic costs, as it undertook to do in the President's speech on May 10. That is a necessary development, but is most unlikely to prove anywhere near sufficient to keep domestic inflation in check. And that for the glaring obvious reason that no one can stave off the effects of imported inflation. Nor the knock-ons, as shown by this week's sharp increase in the price of liberalised bread.
With the outlook so bleak when it comes to the price of crude oil, cereals and all related products, the government will have to consider measures to mitigate their aggressively negative impact on our economy. Much as it may not like to do so for philosophical market reasons, it will have to examine whether it can allocate funds - further funds, one should say, and I'll remind why shortly - to soften the harsh effect of a soaring crude oil price on the cost of water and electricity, and on food prices related to cereals. Because of EU regulations and evolving market structures it may not be able to do so by reducing its take from consumption taxes, but it will have to allocate a higher proportion of them to new measures to soften the blows raining on the Maltese consumer.
The tax take to look at comes mainly from excise duty on petroleum products, in a market which has now also been liberalised. The budget for the current year forecast revenue of some €89 million from this source. It is quite higher than in previous years because excise duty is levied on the whole liberalised markets, which affects Enemalta, now helped to keep cost of output down directly.
The excise duty take comes from €0.474 per litre of petrol, and €0.372 on diesel and kerosene. Against that take the budget allocates a grant to Enemalta of €12.7 million, which allows it to ease the burden of its sales on consumers. An allocation of €7 million goes to the Water Services Corporation, to assist it to subsidise the use of water. Another allocation of €7 million is made, this time under the social solidarity vote, to finance the costing of taking out thousands of lower income households from the water and electricity surcharge net.
In the months ahead, and probably well into 2009 as well, if not beyond that too, the government will have to consider further budgetary measures. If it is unable, for regulatory and operational reasons, to cut excise duty on petroleum it will surely explore how to make higher allocations to soften somewhat the impact of a rising water and electricity surcharge. Any assistance to ST Microelectronics, whether to keep it going or to make its decline more gradual would have to be posited in that scenario. It is in that scenario too that the government will have to reappraise its commitment to slash income tax rates like never before during 2009, to allow an estimated €40.66 million to remain in taxpayers' pockets.
The government is going to have quite a time squaring the economic and financial situations, not to mention its pre-election promises with the unfolding vicious reality.
(concluded)
Growth in the first quarter has maintained the trend, and a rising rate of inflation will have the ironical effect of boosting the government's nominal tax take. But, it would be foolhardy not to recognise that the future threatens. It does so in the first instance because of the turbulence in the economies upon which Malta depends for its main export markets. That turbulence is not restricted to the global credit crunch, regarding which the worse may be over. Nor is currency volatility the end of it. Such volatility does not arise in the eurozone, which absorbs a huge chunk of our exports and where there is no currency implication now that we are also members of it.
The negative outlook lies in the probability that economic activity will slow down, both in the eurozone as well as in our dollar and sterling markets. This is not a doom scenario. Nevertheless it would be a very brave or senseless person indeed who does not recognise that it is one of unavoidable gloom.
That gloom becomes accentuated when one turns to the import side. Whatever our level of exports the material input required for it has to be imported, as has the largest chunk of our domestic consumption. In each case we are facing higher supply prices. The most obvious lie in the soaring price of crude oil and cereals, but watch out for their knock-on effects. These are already being felt, and more lies in store, even as food prices fluctuate around record levels.
The government may tighten up its act and focus more on deterring domestic price increases which are not inevitably related to higher imported and domestic costs, as it undertook to do in the President's speech on May 10. That is a necessary development, but is most unlikely to prove anywhere near sufficient to keep domestic inflation in check. And that for the glaring obvious reason that no one can stave off the effects of imported inflation. Nor the knock-ons, as shown by this week's sharp increase in the price of liberalised bread.
With the outlook so bleak when it comes to the price of crude oil, cereals and all related products, the government will have to consider measures to mitigate their aggressively negative impact on our economy. Much as it may not like to do so for philosophical market reasons, it will have to examine whether it can allocate funds - further funds, one should say, and I'll remind why shortly - to soften the harsh effect of a soaring crude oil price on the cost of water and electricity, and on food prices related to cereals. Because of EU regulations and evolving market structures it may not be able to do so by reducing its take from consumption taxes, but it will have to allocate a higher proportion of them to new measures to soften the blows raining on the Maltese consumer.
The tax take to look at comes mainly from excise duty on petroleum products, in a market which has now also been liberalised. The budget for the current year forecast revenue of some €89 million from this source. It is quite higher than in previous years because excise duty is levied on the whole liberalised markets, which affects Enemalta, now helped to keep cost of output down directly.
The excise duty take comes from €0.474 per litre of petrol, and €0.372 on diesel and kerosene. Against that take the budget allocates a grant to Enemalta of €12.7 million, which allows it to ease the burden of its sales on consumers. An allocation of €7 million goes to the Water Services Corporation, to assist it to subsidise the use of water. Another allocation of €7 million is made, this time under the social solidarity vote, to finance the costing of taking out thousands of lower income households from the water and electricity surcharge net.
In the months ahead, and probably well into 2009 as well, if not beyond that too, the government will have to consider further budgetary measures. If it is unable, for regulatory and operational reasons, to cut excise duty on petroleum it will surely explore how to make higher allocations to soften somewhat the impact of a rising water and electricity surcharge. Any assistance to ST Microelectronics, whether to keep it going or to make its decline more gradual would have to be posited in that scenario. It is in that scenario too that the government will have to reappraise its commitment to slash income tax rates like never before during 2009, to allow an estimated €40.66 million to remain in taxpayers' pockets.
The government is going to have quite a time squaring the economic and financial situations, not to mention its pre-election promises with the unfolding vicious reality.
(concluded)