Not dead in the water

The pre-Budget document very rightly counsels caution. Should the government and the people of Malta fritter away hard-earned gains for temporary populist electoral expediency? Given the choice between steady-as-you-go and let-it-rip-with-all-its-risks, the latter is a definite non-starter.

The volatility of financial markets and in economic scenarios worldwide does not augur well. Did anyone expect Standard’s & Poor to downgrade the US’s credit rating?

Although the only agency to dent the US’s seemingly impregnable credit rating, such decisions are never taken lightly.

Pointing to President Barack Obama and his slide in the polls and to the Democrat v Republican Budget standoff are at best superficial excuses.

Something more ominous must be in the background. Only time will tell what led S&P’s number crunchers to stick their necks out.

Mindless risk-taking in Ireland, the former Celtic Tiger, Greece caught out by creative accounting and cheating the taxman and lax and unwise financial management in Lisbon constrained the EU, at considerable cost to their eurozone partners, to bail them out. Cyprus was hit by a crisis of its own making.

Italy and Spain, where burying the snout in the black economy trough is a way of life, have hurriedly battened down the hatches and keeping their fingers crossed that austerity measures will signal a return to economic sanity and do the trick.

Further north, with the UK’s kitty as bare as Mother Hubbard’s cupboard, and quantitative easing, printing money, the name of the game, the governing coalition has made massive, highly unpopular cuts and struggles to right the wrongs of a decade of profligacy and vote-buying handouts.

Despite the continual sniping and snide criticism of a visceral anti-EU rump in Malta and the UK, both locally and in the UK, the euro has belied portents of instant doom and, albeit unspectacularly, continues to plod along.

Malta weathered the recession that in spring 2008 swept through Europe and spread around the world.

The Maltese economy is small and exposed. Libya, our most valuable trading partner, is in the throes of civil war.

It will recover but needs time. The government’s firm and humane handling of a bloody war on our doorstep has earned plaudits from the people who matter and has kept the door ajar for Maltese businessmen and workers to their pursue their investments and livelihood.

Given the circumstances, that Malta’s Budget deficit forecast by end 2011 is expected to be less than three per cent is a minor miracle. Results do not come about by chance. The government invested wisely in skills and services, utilised EU funding well, put its money where its mouth is and reined in unnecessary expenditure.

Unemployment is down to 4.3 per cent. GDP grew by 2.8 per cent in the second quarter. The gainfully employed and female participation in the labour market stand at record levels.

Recent measures have witnessed the removal of succession duty on one’s residence, the flight departure tax, the credit card levy, TV licences for more than one set as well as additional social, health and educational benefits.

Although the government has satisfied more than 80 per cent of its electoral commitments, Labour opinion formers harp continually on its failure to implement a measure they believe swung the 2008 election.

The point at issue is widening the 25 per cent income tax band into 35 per cent territory for persons earning less than €60,000 annually.

The government initiated the process by increasing the minimum threshold of the lowest tax band and exempted persons with an annual income of less than €12,000 from paying income tax, in other words most state pensioners and at least 38 per cent of workers.

Although, to a small degree, the measure has also benefited taxpayers in higher income brackets.

Unless Malta strikes oil, gas or a hitherto unheard of stream of gold it would be foolhardy and indeed unwise to introduce the measure at this late stage. In my book, firm fiscal management, high employment and a steady hand at the tiller are bigger election winners.

The government has the right priorities. As the world faces the threat of a double dip recession with financial markets behaving unpredictably, the government has correctly, prudently and temporarily put the measure on the back burner.

However, this does not imply that further affordable tweaks to the lower tax bands should not be introduced. The government should continue to remind taxpayers that the measure is alive and kicking and not dead in the water.

Dr Refalo is a former Nationalist Cabinet minister and a former High Commissioner to the UK.