'Budget's economic stimulus bigger than EC-proposed package'

The 2009 budget provides an economic stimulus bigger than that proposed by the European Commission in its European Economic Recovery Plan, Finance Minister Tonio Fenech told Parliament yesterday.

Moreover, many decisions taken - like the lowering of the income tax rates - are not valid only for a year but are of a permanent nature.

Introducing the Budget Measures Implementation Act, Mr Fenech said that the government emphasised on capital investment and this investment, whether public or private, was twice as effective as direct tax cuts and social assistance.

Mr Fenech said that the EU-wide budget stimulus was of 1.5 percent of the 27-nation bloc's gross domestic product, worth €200 billion. This would be made up in 1.2 percentage points of budget spending and 0.3 percentage points of European Union funding. The plan said €170bn of the money would come from the member states and the balance from the EU budget and the European Investment Bank.

The Commission's aim was to help member states deal with the present challenges.

The government not only agreed with this, but its 2009 budget was based on the same principle - investing to truly help the economy. The Commission had put Malta's economic growth for 2009 at two per cent. The Commission's proposal was that each member state should offer a package which, in monetary terms, would amount to €65 million. The economic package proposed by the government, he said, was worth more than €325 million. The government was allocating €46m to specific segments of society which were more in need.

An investment of €124 million would strengthen various important sectors of the infrastructure, such as roads, factories and schools, as well as other facilities which would benefit tourism such as the embellishment and restoration of bastions.

Direct investment in the country came up to around €61 million, as well as €30 million more allocated to renewable energy.

The budget also proposed various measures to favour consumers, such as energy-saving lamps which would cost the government €4 million. A further saving of between €12 million and €15 million was expected to be made in the consumption of electricity.

Mr Fenech said the government was investing €58 million in training to help workers face challenges in the labour market. Direct investment in industry would be €50 million.

The impact of these measures would be felt not only in 2009 but also in 2010 and 2011.

Contrary to the impression which the Opposition had given, the budget was not just a direct investment package. In a small economy such as Malta's, the impact of investment would greatly benefit economic growth. The European Commission emphasised this point and directed member states to invest in construction and capital projects which were not normally undertaken by the private sector.

As evidenced by the Governor General of the Central Bank, in his presentation to the House Public Accounts Committee, capital investment, whether public or private, had a positive impact which was double that of reductions in income tax or increased social assistance.

When the government or the private sector invested in a local project, that investment created economic activity and money remained in Malta. When it purchased an overseas product, money was exported and not enjoyed by the Maltese.

Minister Fenech said that the budget addressed the issue of purchasing power and helped people to participate in economic activity. Even the EU had made it clear that every country had to adopt a model relevant to its own needs. The proposals announced by the British government to stimulate economic activity had similar intentions to the measures adopted by Malta.

However, there were marked differences. VAT in the UK was being reduced by 2.5 per cent for the next 13 months, income tax rates were increased for higher-income earners and insurance contributions were also increased.

In Malta, the government reduced income tax by €12 million not just for one year but on a permanent basis. The government also gave €8 million as energy benefits and gave a cost-of-living increase to pensioners in full - an expenditure of €6 million. Another €1.5 million were given to service pensioners.

The minister explained that these measures left €46 million more in the people's pockets. The government measures to reduce income tax between 2007 and 2009 by €68 million would result in better purchasing power, which was to increase by 1.2 per cent by next year. This increase was also in line with EU measures. The difference was that these measures in Malta were on a permanent basis and not a one-off basis.

Mr Fenech also referred to the deficit for 2009, which would increase from €20 to €98 million in view of the exceptional global financial circumstances. This was an increase of 1.2 percent, in line with EU expectations.

Through the Bill the government was requesting the House to approve public borrowing up to €500 million. Mr Fenech explained that €200 million would be used to replace maturing stocks while another €200 million would be used to liquidate Treasury Bills.

He also referred to the lowering of excise duties on alcohol, making prices in Malta comparable to those in Sicily. Another measure increased the legal drinking age of alcohol to 17.

The increases in excise duty on fuel aimed at creating the energy efficiency fund, with incentives amounting to €30 million given to households to invest in energy-saving systems.

Another €10 million were being allocated to industry for the same purpose.

Other income tax reductions and incentives to attract more women to return to work amounted to €12 million. Mr Fenech also focussed on amendments relating to the licensing of cars.

The government was applying the polluter-pays principle, taking into consideration smoke emissions and traffic congestion. The reform was aimed at a culture change to encourage people to use smaller and cleaner cars.

Once the budget had been announced, many who owned family cars of a certain age had complained against the new licensing system. As a result, the government was revising these measures.

Licences for diesel cars from 1800 cc to 2000 cc were being reduced by between €22 and €117 for 19-year-old cars. The maximum licence would not exceed €300.

The licence of cars of 2000 cc were having their licences reduced by between €22 and €184.

Licences for petrol cars from 1800cc to 2000 cc would be cheaper by between €20 and €106. Cars of 2000 cc would have their licences reduced by between €20 and €168.

Mr Fenech also announced that car dealers who had ordered cars before November 3 had the option to choose to register them either under the old system or the new.

A transition period of one year was also being given to taxi drivers who had the option to register their cars at the rate of 20 per cent under the old system while entering the new system by 2010.

Licences of hybrid cars were being calculated on the assumption that 20 per cent of energy used was through their batteries.