As expected the government’s Budget for 2011 did not contain any savage spending cuts, nor did it introduce any radical structural reforms of the economy. The modest taxes introduced did not create an uproar - with the exception of the increase in VAT on hotel accommodation from five to seven per cent - which not surprisingly, has been severely criticised by the MHRA.
The overall thrust of the Budget was that of fiscal consolidation, job creation and the enhancement of the country’s social and education sectors. Finance Minister Tonio Fenech said the government intends to reduce the fiscal deficit – which this year is expected to reach 3.9 per cent of GDP – to 2.8 per cent by 2011, mainly through slightly decreased public expenditure.
There was no mention in the Budget of pension or social welfare reform and the only attempt to reform the health sector was the establishment of a system of independent auditing to evaluate samples of persons receiving free medicines in order to combat abuse in this sector. Neither were any specific measures announced to tackle other structural problems such as low investment by the private sector and the fact that our GDP per capita is falling behind the EU average.
“We are controlling, and where possible, decreasing public expenditure in a planned and strategic manner. Whilst continuing to maintain the required services and investment, we are ensuring that we do not endanger our country’s economic sustainability,” Mr Fenech told Parliament.
Mr Fenech added: “We must all contribute, in a prudent manner, towards an economy which is capable of maintaining sustainable growth in our country, creating employment, balancing the security of jobs and wages, and protecting the social security system so as to protect and support those in need.”
The measures announced by the government to reduce public spending and the public sector – which employs close to 30 per cent of the workforce – were modest in nature. These include a requirement by government departments and entities to improve their efficiency by at least two per cent, an improvement in law enforcement against fraud and tax evasion and a reduction in government arrears by 10 per cent.
Other measures involve employing, wherever possible, only one person for every two whose employment is terminated in the public sector and a review of the government’s procurement methods and use of transport.
Mr Fenech announced a Budget for 2011 of €2.9 billion, of which €340 million will be spent on education and training, €858 million on pensions and social security, €378 million on health and €440 million on projects and capital investments.
New taxes introduced (besides the VAT on tourism) were an increase on the excise duty on fuel by 3c per litre, an increase of three and four per cent respectively on the tax on cigarettes and tobacco, an increased by 1c per 25cl bottle on the tax on local beer and a 13 per cent hike on the tax on spirits. All the revenue generated through these taxes will be channelled towards the health sector, Mr Fenech said. The government also announced a tax of €9 on every tonne of cement as part of its “polluter pays principle”.
The increase in VAT on hotel accommodation is probably the government’s biggest gamble in this Budget as the MHRA has long complained of decreasing profits in the industry over the past five years, mainly due, they point out, to additional government induced costs. Furthermore, although the tourism figures this year have been very encouraging, nobody yet knows how the savage austerity measures introduced in the UK – Malta’s most important source market for tourism – will affect the British economy.
Despite an emphasis on reduced government spending the government introduced a number of new social measures such as paying those on the minimum wage a weekly €25 allowance if they attend ETC training courses.
Furthermore, the supplementary allowance for low income earners has been increased to a maximum of €4.57 per week for a single person and €8.13 per week for a married couple.
Self employed part time women are being given the option to pay a 15 per tax rate or the minimum national insurance contribution in order to encourage them to regularise their position in the labour market. New childcare centres are to be built at the Hal Far, Xewkija and Bulebel industrial estates, as well as in Santa Venera and Floriana.
The government also ann-ounced a €1.16 per week cost of living increase, which will also be given in full to pensioners. Pensioners receiving a service pension will have another €200 deducted from the calculation of their government pension.
A number of business friendly measures were also introduced. This year’s tax credit scheme for SMEs has been extended to next year and a €1 million fund has been set up to help small businesses export their products and services to new markets. Businesses paying their VAT dues online will have their payment deadline extended by seven days while anyone who declares a turnover of less than €7,000 need not register with the VAT department.
The Malta Tourism Authority Budget has been increased by €4 million to €35 million, an additional €10 million has been set aside to help hotels improve their product and a €3 million fund has been set up for the training of middle management tourism operators.
Mr Fenech also announced a scheme – probably the most innovative measure in the Budget - in which anyone scrapping a car at least 10 years old will be entitled to a €2,000 subsidy when buying a new small car.
The education Budget has been increased by €32 million and the income on which parents of children in a private school are entitled to a tax rebate has been increased from €1,000 to €1,200 for primary schools or kindergartens, and from €1,400 to €1,600 in secondary schools. The VAT paid by private schools for new buildings will be refunded.
The health Budget has also increased, by €12 million, and €14 million has been allocated for the Oncology Centre at Mater Dei Hospital. €2.3 million has been set aside for increased hospital operations.
Local councils will receive €32 million more from the central government.
The Chamber of Commerce, Industry and Enterprise said it was concerned at the budgeted increase in revenue through taxation, VAT and national insurance because this assumed economic growth would continue. It criticised the fact that the country had wasted another opportunity to restructure the COLA mechanism and was concerned over the increase in VAT on hotel accommodation. It praised the measure announced to encourage low income workers to attend training courses, the car scrappage scheme as well as the €1 million fund to encourage companies to export.
The Malta Employers Association said the Budget for 2011 was by no means an expansionary budget, as the government is struggling to achieve expenditure cuts as painlessly as possible.
“It is evident that a number of measures proposed by the social partners, such as partial payment for maternity leave, were not taken on board because they were not affordable in the present circumstances. However, the budget also contains incentives and initiatives to maintain the momentum in economic growth experienced in 2010, and it is only through such growth that the fiscal targets can be achieved,” it said.
The MEA also praised the car scrappage scheme and the incentives for training.
The GRTU called the Budget “two-faced” with one smiling at the economy and another bitter towards the lack of measures announced to help SMEs.
While the GRTU agreed with the government’s economic and financial strategy, it could not comprehend the measures it had decided on.
Once again, it said, the Budget represented “the loss of an opportunity to seriously help small businesses to find guaranteed means of credit to renovate and look ahead with confidence in the shortest time possible”.
In a statement, the GRTU said it accepted that the economic strategy outlined in the Budget was correct and that the government was right to aim to curb the deficit and reduce public spending.
Budget highlights
VAT on tourism accommodation increased from five per cent to seven per cent.
Car scrapping scheme: Up to €2,000 subsidy for every old car replaced by a small new car.
€200 increased rebate on private school fees.
Increased excise tax on fuel, cigarettes, tobacco and beer.
€1.16 cost of living increase.
More spending on health and education.
MTA Budget increased to €35 million.
Government departments must improve efficiency by two per cent.
Less recruitment in public sector.
System to audit samples of people receiving free medicines.
Microinvest schemes for SMEs to remain in place.
Self-employed women working part-time given option to pay 15 per cent pro-rata national insurance contribution on income.
Farmers pay less social security contributions.
€9 excise duty per tonne of cement introduced.
€25 weekly allowance for minimum wage earners who attend training courses.
€1 million fund to help SMEs in exports.
€9 million for Malta Enterprise.
€35 million for MTA.
GDP forecast for 2011: three per cent growth.