Tax cuts: How much room for manoeuvre?
Should the government have been more generous with its tax cuts announced in the budget for next year when one considers that Malta could face an economic slowdown soon and the eurozone is on the brink of a recession? The cuts announced were modest...
Should the government have been more generous with its tax cuts announced in the budget for next year when one considers that Malta could face an economic slowdown soon and the eurozone is on the brink of a recession?
The cuts announced were modest indeed - a person on a married rate can save a maximum of €215 annually, while someone on a single rate can save €153 a year at most. The maximum marginal tax rate remained at 35 per cent, despite a promise by the government in its electoral manifesto and the pre-budget document to reduce it 25 per cent.
Finance Minister Tonio Fenech remained non-committal about whether the government intends to stagger the reduction of the top income tax rate over the next four years. He told The Times Business: "Do we know when the recession/economic slump hitting a number of industrialised nations will come to an end? Not really. So in the same way it would be irresponsible to commit ourselves at this stage on such issue."
Economist Edward Scicluna believes that "political promises apart" Mr Fenech's reply "is quite correct in the present circumstances". He told The Times business: "However the economist has to go beyond this reply. Should the government be advised to spend more and tax less beyond what has been suggested in the 2009 budget as a stimulus to our local economy?"
"We will soon be pressed to decide because we just cannot be deceived by the current 'quiet before the storm'. The IMF, in notching global growth down by a percentage point last week, is itself under shock with the unexpected news that the firewall between us and the far-eastern countries has broken down even with regards to the financial crises. The coming year has been declared a global recession whose bottom is nowhere yet in sight," he said.
Prof. Scicluna explained that the standard textbook reply that both monetary and fiscal policy should be expansionary in such a situation begs the most important question of all: Do our policy makers have room to manoeuvre? "Everybody seems to be ignoring such a basic and important strategic prerequisite for warding off an attack.
"On the monetary policy front, we are now led by the ECB whose latest rate cut to 3.25 per cent shows that as a eurozone member we have still some dry powder left in our arsenal. We can rest assured that it would be used if the need arises. Of course nominal rates cannot go into negative territory (fall below zero) and therefore that is the limit we can push in that regard."
Prof. Scicluna said that on the fiscal front things are more complicated. The Maltese economy is quite an open economy, not unlike a sieve he points out. "Any fiscal stimulus would very quickly fizzle out. We have few backward linkages and thus a high import content. In quite a short time we find ourselves in a very small way stimulating our trade partners' economy rather than ours."
"Furthermore, the countries which really have the room to manoeuvre are the surplus countries. In a big way there is China, followed by many oil producers, Singapore and some EU surplus countries. Malta is not one of them. With an EU forecasted cyclically adjusted deficit of 4 per cent and a debt/GDP ratio of 63.1 per cent by the end of this year, to say that we have little fiscal room to manoeuvre is an understatement. We may not realise this but, with a 1 per cent negative growth scenario, a 3 per cent primary deficit might find our debt/GDP ratio surpassing the 100 per cent mark in a matter of a few years. The consequences would be catastrophic," he said.
Prof Scicluna said that Malta's fiscal stimulus would make sense if, in a modest way, it were to participate in an EU-wide fiscal stimulus when this is agreed.
"Very significantly it is the other trading countries own fiscal stimuli which would affect our economy in a big way. So we should encourage and participate. If this were to be done Malta has to make judicious use of this package. It cannot splurge around. It should use it to support obvious key firms in trouble and suffering families directly hit by the recession.
"In the meantime, more than ever we should make an effort to make full use (not partial as at present) of external structural funding for key infrastructural projects. We should attempt to raise productivity in the public sector to relieve firms from fiscal burdens such as taxes and charges. It is no good news that the national fiscal burden is being inched up by another one per cent of GDP when we promised to do the opposite. Most importantly we should ensure internal stability and avoid shocks. The spreading of the utility charges hikes over say two or three years, rather than as announced, would go a long way in this regard."
The cuts announced were modest indeed - a person on a married rate can save a maximum of €215 annually, while someone on a single rate can save €153 a year at most. The maximum marginal tax rate remained at 35 per cent, despite a promise by the government in its electoral manifesto and the pre-budget document to reduce it 25 per cent.
Finance Minister Tonio Fenech remained non-committal about whether the government intends to stagger the reduction of the top income tax rate over the next four years. He told The Times Business: "Do we know when the recession/economic slump hitting a number of industrialised nations will come to an end? Not really. So in the same way it would be irresponsible to commit ourselves at this stage on such issue."
Economist Edward Scicluna believes that "political promises apart" Mr Fenech's reply "is quite correct in the present circumstances". He told The Times business: "However the economist has to go beyond this reply. Should the government be advised to spend more and tax less beyond what has been suggested in the 2009 budget as a stimulus to our local economy?"
"We will soon be pressed to decide because we just cannot be deceived by the current 'quiet before the storm'. The IMF, in notching global growth down by a percentage point last week, is itself under shock with the unexpected news that the firewall between us and the far-eastern countries has broken down even with regards to the financial crises. The coming year has been declared a global recession whose bottom is nowhere yet in sight," he said.
Prof. Scicluna explained that the standard textbook reply that both monetary and fiscal policy should be expansionary in such a situation begs the most important question of all: Do our policy makers have room to manoeuvre? "Everybody seems to be ignoring such a basic and important strategic prerequisite for warding off an attack.
"On the monetary policy front, we are now led by the ECB whose latest rate cut to 3.25 per cent shows that as a eurozone member we have still some dry powder left in our arsenal. We can rest assured that it would be used if the need arises. Of course nominal rates cannot go into negative territory (fall below zero) and therefore that is the limit we can push in that regard."
Prof. Scicluna said that on the fiscal front things are more complicated. The Maltese economy is quite an open economy, not unlike a sieve he points out. "Any fiscal stimulus would very quickly fizzle out. We have few backward linkages and thus a high import content. In quite a short time we find ourselves in a very small way stimulating our trade partners' economy rather than ours."
"Furthermore, the countries which really have the room to manoeuvre are the surplus countries. In a big way there is China, followed by many oil producers, Singapore and some EU surplus countries. Malta is not one of them. With an EU forecasted cyclically adjusted deficit of 4 per cent and a debt/GDP ratio of 63.1 per cent by the end of this year, to say that we have little fiscal room to manoeuvre is an understatement. We may not realise this but, with a 1 per cent negative growth scenario, a 3 per cent primary deficit might find our debt/GDP ratio surpassing the 100 per cent mark in a matter of a few years. The consequences would be catastrophic," he said.
Prof Scicluna said that Malta's fiscal stimulus would make sense if, in a modest way, it were to participate in an EU-wide fiscal stimulus when this is agreed.
"Very significantly it is the other trading countries own fiscal stimuli which would affect our economy in a big way. So we should encourage and participate. If this were to be done Malta has to make judicious use of this package. It cannot splurge around. It should use it to support obvious key firms in trouble and suffering families directly hit by the recession.
"In the meantime, more than ever we should make an effort to make full use (not partial as at present) of external structural funding for key infrastructural projects. We should attempt to raise productivity in the public sector to relieve firms from fiscal burdens such as taxes and charges. It is no good news that the national fiscal burden is being inched up by another one per cent of GDP when we promised to do the opposite. Most importantly we should ensure internal stability and avoid shocks. The spreading of the utility charges hikes over say two or three years, rather than as announced, would go a long way in this regard."