Tourism: A quest for the feel-good factor

The performance of the tourism industry speaks for itself. Regular monthly statistics paint a dull picture. The views of tourism operators and their outlook for the coming months are common knowledge and there is no need to repeat them here. It is also obvious that this highly important industry is facing threats from various angles and is in urgent need for a clear direction with specific and timely policy measures. Only a clearly set out tourism policy can set the stage for the subsequent tourism plan and its implementation.

I take it for granted that the authorities' objective is to make the tourism sector thrive again, such that it continues to contribute to the socio-economic wealth of these islands. However, drawing up mission statements and giving token assistance will not help much. It is widely recognised that, most of the time, the government cannot directly influence things. For example, although knowledge investment is a key to economic growth, it is clear that it is not in the power of the government to increase R&D spending (of the private sector) directly. However, with appropriate policies, such as tax incentives, the government can induce firms to increase intangible investment. The same argument holds for tourism. While the government cannot directly bring tourists to the Maltese islands, it still has a pivotal role in the industry set-up through its policy measures.

When drawing up policy measures, the government can do worse than listening to what the operators and stakeholders are proposing while at the same time keeping its eyes firmly on the larger picture. This assumes great importance, especially when competing countries are exploiting rising opportunities. A case in point is the political agreement reached last March at the Ecofin Council where member states were given the option to apply a reduced VAT rate to restaurant services on the basis that restaurant services are locally supplied services that do not cause significant distortion of competition on the internal market. This option was immediately taken up by France, which decreased the cost of restaurant meals via a cut in VAT from 19.6 per cent to 5.5 per cent in a move designed to boost consumer confidence. Other countries are considering similar action.

Both the Labour Party (PL) and the Malta Hotels and Restaurants Association forwarded similar proposals. However, Finance Minister Tonio Fenech was reported saying there will be no VAT cut on restaurants before the next budget. One hopes that, eventually, goodwill shall prevail and such a reduction will be announced as soon as possible.

The PL believes that cutting the VAT rate from 18 per cent to five per cent will impact positively on both the economy and the tourism sector. Let's not forget that Malta was placed 100 out of 130 countries on the Price Competitiveness Index as measured by the Travel and Tourism Competitiveness Report 2008. Moreover, Malta is the EU country in the entire Mediterranean region with the highest VAT rate. Hence, such a reduction will boost Malta's attractiveness as a tourist destination.

Nevertheless, the extent of the benefits that this measure can have on the sector and on the economy as a whole are debatable, with much depending on how much of this reduction will be passed on to the consumer. Again, the government should make sure that the appropriate structures and arrangements are made so that a large part of the VAT reduction is reflected in the final prices. Nonetheless, probably the biggest positive impact of the eventual implementation of this measure is a behavioural one, in that a feel-good factor will be generated, increasing demand for restaurants services and, consequently, helping to safeguard jobs.

Being sceptical of any proposal forwarded by the stakeholders or the PL will not help. Taking either a defeatist attitude or giving greater priorities to "balancing the books exercises" over safeguarding employment will prove detrimental to everyone, especially in today's reality.

The author is a Labour member of Parliament.