Editorial

More cuts in state subsidies are expected to be announced in the budget for 2010, something that most would have already foreseen considering the drop in government revenue in the wake of the economic slowdown.

The government had not yet an-nounced the amnesty to be given to taxpayers on the payment of fines and interest due on unpaid tax when the Finance Minister, Tonio Fenech, recently spoke of the government's plans to keep cutting subsidies in an interview he gave to The Times Business. He did not specifically indicate the planned cuts but, all in all, there appeared to be a sense of urgency in moving ahead in this direction, seemingly more out of necessity to make up for lost revenue than to keep to the desirable principle of doing away with subsidies. In a way, the government had not handled the removal of subsidies well, as shown by the clumsy way in which it raised the water and energy rates, a matter that still rankles deeply. But with the economic slowdown steadily eating away at the Exchequer's revenue, the government is no doubt very actively considering what new income sources could possibly make up for the loss.

The amnesty on fines and interest on unpaid tax, a move that, with good reason, has infuriated honest taxpayers, is one such avenue, though the degree of success has yet to be seen.

In the long run, however, the move could be counter-productive as it may well erode voluntary tax compliance, a point that was also made by the International Monetary Fund when it criticised the government's decision to allow late tax payment from companies experiencing cash-flow problems. The government argued this was meant to save jobs but the IMF's point is valid too, and it would be unwise to brush it aside. The amnesty given to tax defaulters does not help promote fiscal morality either.

The recession has thrown forecasts into confusion. In his interview with this newspaper, the Finance Minister gave the drop in revenue from income tax and value added tax alone, in the first half this year at €60 million, not an insignificant figure.

The total revenue shortfall is expected to be of €80 million. In his own words, this has created a "huge" budgetary constraint, although he said they had managed to work within such constraints. The budget deficit last year was of 4.7 per cent and this year it is expected to be of 3.8 per cent, still above the three per cent threshold, as required by the EU's stability and growth pact. Even though the minister has said that the "worst is over" it remains to be seen to what extent the economic situation will improve in 2010.

Bridging this time will require foresight, discipline and strict enforcement of revenue collection arrangements. Had there been greater efficiency in income tax collection, for example, the figure of uncollected tax would not have risen astronomically over the years. Tax contestations would need to be tackled without undue loss of time to avoid backlog and a greater effort would have to be made to check rampant abuse in benefits than what is happening now. Firms hit by the removal of subsidies will, no doubt, cry foul but, hopefully, those affected will be forced to see how they can become more efficient, there-by bailing themselves out of trouble and, equally important, saving costs to the taxpayer who paid out the subsidy in the first place.