Economists differ over impact of budget deficit
Economists Edward Scicluna and Gordon Cordina have differed over the impact of the budget deficit forecast for this year. Prof. Scicluna doubted whether Malta will ever achieve sustainable public finances while Dr Cordina said the fiscal deficit at...
Economists Edward Scicluna and Gordon Cordina have differed over the impact of the budget deficit forecast for this year. Prof. Scicluna doubted whether Malta will ever achieve sustainable public finances while Dr Cordina said the fiscal deficit at this stage was both unavoidable and probably warranted.
Finance Minister Tonio Fenech announced in his budget speech on Monday that this year's deficit is expected to reach €200.1 million or 3.5 per cent of GDP, compared to the original estimate of €70.3 million (1.2 per cent of GDP). He said the early retirement schemes for Malta Shipyards employees and higher subsidies for Enemalta due to the increase in the cost of oil during the year were responsible for the deficit expansion.
Prof. Scicluna said the budget, more than any other past budget, is rightly being analysed for its economic management content, "rather than for the one-cent-tax-here-and-the-two-cents-benefits-there traditional review".
He said this budget raises serious questions "about our prospects of ever obtaining a sustainable public sector and with it sustainable public finances".
He added: "The European Union has often warned us that sustainability is not shown by a series of one-off revenue generation schemes. Neither by a quick resort to quick tax and spend programmes."
Prof. Scicluna said the government is trying to downplay its "unprecedented" fiscal slippage just in its very first year of its eurozone membership. "My evaluation shows that the problem is deeper. We have yet to see a declining Debt to GDP ratio caused by sustainable finances rather than merely by privatisation proceeds."
He said: "The appetite for painful reforms has been diminishing and the electorate has been regaled with a picture of an economy which was ripe enough to start delivering the fruits borne through painful toiling years before."
Prof. Scicluna said that under normal circumstances the government would have found it extremely difficult to make up for "these misguided and confusing signals".
"In the present circumstances the problem has become much more complicated. There are now at the same time enormous pressures to let go and counter pressures to contain the deficit. In this scenario the economist has yet to look forward to the day when he can be convinced that our country can ever achieve sustainable public finances with the currently unreformed and deeply ingrained attitudes. But does anybody care today?" he asked.
Dr Cordina said an increase in the fiscal deficit "is at this stage unavoidable and probably warranted".
"It will be important to increasingly redirect expenditure towards productivity enhancing activities so as to enable the economy to emerge even stronger from the forthcoming pressures. Fiscal resources devoted towards subsidising consumption would merely result in an economy that is more dependent on the government, and hence less viable in the long term," he said.
Dr Cordina said the budget was presented against the background of a difficult international economic scenario which is already impacting on the domestic economy.
"Moreover, the budget has to contend with the unavoidable consequences of difficult decisions which had to be taken in relation to the privatisation of the shipyards and the increase in water and utility tariffs. These considerations impose notable constraints on the manoeuvrability of fiscal policy and imply sacrificies on families and the economy."
Dr Cordina said the policy priority at this stage is to defend jobs and economic activity in Malta in the wake of imminent difficulties in export markets.
"The budget provides for measures to help tourism, manufacturing and construction, whose effects will be strongly dependent on the effectiveness and efficiency with which they will be implemented.
"The budget could perhaps have been more mindful of the need to reduce certain costs of doing business in Malta. The emphasis on environmental and alternative energy measures placed by the Budget 2009 is important," he said.
Highlights of Monday's budget
Cost of Living Allowance
All employees will be given a €4.08 cost-of-living weekly increase. The increase will be given in full to pensioners.
Income tax
Modest income tax cuts were announced. The maximum tax saved will be €215 per year for those on married rates and €153 per year for those on single rates. A one-year income tax exemption has been granted to women returning to work after a five-year absence for every child under 16. An income tax exemption also applies for every other working mother in respect of children born during 2007 and after. Penalties for late filing and taxpayers' defaults under the Income Tax Act and VAT Act are to be revised. The interest for late payments of tax is to be reduced from 1 per cent to 0.75 per cent per month.
Exemption from stamp duty
Disabled persons living with their parents or guardians will be exempt from stamp duty on the inheritance of their ordinary residence.
Tax on hotel accommodation
As from January 1, 2010, a tax of €0.50 per night will be imposed in any paid collective and private accommodation.
Tax on plastic bags
A tax of €0.15 is to be charged on each plastic bag. A tax of €0.01 per 80 grammes will be charged on certain magazines and leaflets which consist of more than 50 per cent advertising content.
Pools licence
The licence fees for private and hotel pools are to be increased.
Excise tax on alcohol and cigarettes
The excise tax on spirits is being decreased while that on cigarettes is being increased by €0.20 a pack.
Motor vehicles registration tax
The motor vehicle registration tax is being completely overhauled and is to be based on emissions of CO2 and particulate matter and the length of the vehicle. The bigger the engine capacity the more tax will be paid.
Vehicle licences
The licence fee for cars registered as from January 1, 2009 will depend on the category of emission level and the age of the vehicle, with such fee remaining fixed for the first five years and then increasing gradually. For vehicles registered before January 1, 2009, the licence fee will depend on the cylinder capacity and the age of the vehicle.
Enterprise incentives
€500,000 will be allocated for initiatives intended to enable entrepreneurs to identify new markets. Grants will be given to increase investment in research. A Small Start-Up Scheme will be introduced as well as the expansion of the Kordin Business Incubation Centre to assist in the setting up of new companies. An E-business Development Grant Scheme will be set up to incentivise the use of IT within companies. Two Micro Enterprises Parks will be developed in Mellieha and Xewkija, Gozo, as industrial zones.
SMEs
A Small Business Act will be passed to facilitate the regulatory framework within which small enterprises operate. General accounting principles for small businesses will be introduced to reduce the burden in terms of excessive reporting requirements currently applicable under IFRSs. A two-year income tax credit will be granted for small enterprises investing a minimum of €10,000.
Energy consumption
Every family will be entitled to free energy-saving lamps. A tax of €0.25 and €0.50 will be imposed on traditional bulbs and neon tubes. Part of the cost of solar water heaters will be refunded, up to a maximum of €460. Schemes will be introduced to finance 50 per cent of investment in photovoltaic cells up to a maximum of €3,000 and 33 per cent of investment in roof insulation and double glazed windows, up to a maximum of €300.
Energy consumption aimed at industry
Funds will cover 60 per cent of the cost of approved expenditure in renewable energy. There will be aid amounting to 40 per cent in respect of energy system audits, up to a maximum of €300 and €1,000 for small and large enterprises respectively. An offshore wind farm will be set up for the provision of energy. The tax on petrol has been increased by €0.055 per litre and the tax on diesel has been increased by €0.02 per litre. This will finance a fund for renewable energy.
Service pensions
There will be a further €200 deduction from the service pension when calculating the social security pension.
Children with special needs
The government will finance the cost of facilitators for children with special needs at private schools, just like it does for children at Church and state schools.
Home loan repayments
A means-tested scheme involving the financing of up to 30 per cent of the monthly loan repayments for a period of 10 years in respect of first residences will be introduced.
Yachts
The annual licence fees for yachts will be increased.
Finance Minister Tonio Fenech announced in his budget speech on Monday that this year's deficit is expected to reach €200.1 million or 3.5 per cent of GDP, compared to the original estimate of €70.3 million (1.2 per cent of GDP). He said the early retirement schemes for Malta Shipyards employees and higher subsidies for Enemalta due to the increase in the cost of oil during the year were responsible for the deficit expansion.
Prof. Scicluna said the budget, more than any other past budget, is rightly being analysed for its economic management content, "rather than for the one-cent-tax-here-and-the-two-cents-benefits-there traditional review".
He said this budget raises serious questions "about our prospects of ever obtaining a sustainable public sector and with it sustainable public finances".
He added: "The European Union has often warned us that sustainability is not shown by a series of one-off revenue generation schemes. Neither by a quick resort to quick tax and spend programmes."
Prof. Scicluna said the government is trying to downplay its "unprecedented" fiscal slippage just in its very first year of its eurozone membership. "My evaluation shows that the problem is deeper. We have yet to see a declining Debt to GDP ratio caused by sustainable finances rather than merely by privatisation proceeds."
He said: "The appetite for painful reforms has been diminishing and the electorate has been regaled with a picture of an economy which was ripe enough to start delivering the fruits borne through painful toiling years before."
Prof. Scicluna said that under normal circumstances the government would have found it extremely difficult to make up for "these misguided and confusing signals".
"In the present circumstances the problem has become much more complicated. There are now at the same time enormous pressures to let go and counter pressures to contain the deficit. In this scenario the economist has yet to look forward to the day when he can be convinced that our country can ever achieve sustainable public finances with the currently unreformed and deeply ingrained attitudes. But does anybody care today?" he asked.
Dr Cordina said an increase in the fiscal deficit "is at this stage unavoidable and probably warranted".
"It will be important to increasingly redirect expenditure towards productivity enhancing activities so as to enable the economy to emerge even stronger from the forthcoming pressures. Fiscal resources devoted towards subsidising consumption would merely result in an economy that is more dependent on the government, and hence less viable in the long term," he said.
Dr Cordina said the budget was presented against the background of a difficult international economic scenario which is already impacting on the domestic economy.
"Moreover, the budget has to contend with the unavoidable consequences of difficult decisions which had to be taken in relation to the privatisation of the shipyards and the increase in water and utility tariffs. These considerations impose notable constraints on the manoeuvrability of fiscal policy and imply sacrificies on families and the economy."
Dr Cordina said the policy priority at this stage is to defend jobs and economic activity in Malta in the wake of imminent difficulties in export markets.
"The budget provides for measures to help tourism, manufacturing and construction, whose effects will be strongly dependent on the effectiveness and efficiency with which they will be implemented.
"The budget could perhaps have been more mindful of the need to reduce certain costs of doing business in Malta. The emphasis on environmental and alternative energy measures placed by the Budget 2009 is important," he said.
Highlights of Monday's budget
Cost of Living Allowance
All employees will be given a €4.08 cost-of-living weekly increase. The increase will be given in full to pensioners.
Income tax
Modest income tax cuts were announced. The maximum tax saved will be €215 per year for those on married rates and €153 per year for those on single rates. A one-year income tax exemption has been granted to women returning to work after a five-year absence for every child under 16. An income tax exemption also applies for every other working mother in respect of children born during 2007 and after. Penalties for late filing and taxpayers' defaults under the Income Tax Act and VAT Act are to be revised. The interest for late payments of tax is to be reduced from 1 per cent to 0.75 per cent per month.
Exemption from stamp duty
Disabled persons living with their parents or guardians will be exempt from stamp duty on the inheritance of their ordinary residence.
Tax on hotel accommodation
As from January 1, 2010, a tax of €0.50 per night will be imposed in any paid collective and private accommodation.
Tax on plastic bags
A tax of €0.15 is to be charged on each plastic bag. A tax of €0.01 per 80 grammes will be charged on certain magazines and leaflets which consist of more than 50 per cent advertising content.
Pools licence
The licence fees for private and hotel pools are to be increased.
Excise tax on alcohol and cigarettes
The excise tax on spirits is being decreased while that on cigarettes is being increased by €0.20 a pack.
Motor vehicles registration tax
The motor vehicle registration tax is being completely overhauled and is to be based on emissions of CO2 and particulate matter and the length of the vehicle. The bigger the engine capacity the more tax will be paid.
Vehicle licences
The licence fee for cars registered as from January 1, 2009 will depend on the category of emission level and the age of the vehicle, with such fee remaining fixed for the first five years and then increasing gradually. For vehicles registered before January 1, 2009, the licence fee will depend on the cylinder capacity and the age of the vehicle.
Enterprise incentives
€500,000 will be allocated for initiatives intended to enable entrepreneurs to identify new markets. Grants will be given to increase investment in research. A Small Start-Up Scheme will be introduced as well as the expansion of the Kordin Business Incubation Centre to assist in the setting up of new companies. An E-business Development Grant Scheme will be set up to incentivise the use of IT within companies. Two Micro Enterprises Parks will be developed in Mellieha and Xewkija, Gozo, as industrial zones.
SMEs
A Small Business Act will be passed to facilitate the regulatory framework within which small enterprises operate. General accounting principles for small businesses will be introduced to reduce the burden in terms of excessive reporting requirements currently applicable under IFRSs. A two-year income tax credit will be granted for small enterprises investing a minimum of €10,000.
Energy consumption
Every family will be entitled to free energy-saving lamps. A tax of €0.25 and €0.50 will be imposed on traditional bulbs and neon tubes. Part of the cost of solar water heaters will be refunded, up to a maximum of €460. Schemes will be introduced to finance 50 per cent of investment in photovoltaic cells up to a maximum of €3,000 and 33 per cent of investment in roof insulation and double glazed windows, up to a maximum of €300.
Energy consumption aimed at industry
Funds will cover 60 per cent of the cost of approved expenditure in renewable energy. There will be aid amounting to 40 per cent in respect of energy system audits, up to a maximum of €300 and €1,000 for small and large enterprises respectively. An offshore wind farm will be set up for the provision of energy. The tax on petrol has been increased by €0.055 per litre and the tax on diesel has been increased by €0.02 per litre. This will finance a fund for renewable energy.
Service pensions
There will be a further €200 deduction from the service pension when calculating the social security pension.
Children with special needs
The government will finance the cost of facilitators for children with special needs at private schools, just like it does for children at Church and state schools.
Home loan repayments
A means-tested scheme involving the financing of up to 30 per cent of the monthly loan repayments for a period of 10 years in respect of first residences will be introduced.
Yachts
The annual licence fees for yachts will be increased.