When the Labour government put forward the Budget for 2013 as it had been crafted by the previous Nationalist government, it fulfilled a promise it had made during the electoral campaign. The objective was not to create uncertainty, or to delay the passing of the Budget beyond the 80 days into the budget year up to the general election. The decision, one might say, was forced on the new government by circumstance.
Even so, adopting the whole package was not necessarily a wise thing to do. That included an income tax measure which the Nationalist government had promised years ago. As likely as not, it included it in the pre-election budget only for political reasons. The measure expanded the 25 per cent income tax band such that next rate, the top marginal rate of 35 per cent was only reached when a taxpayer surpassed €60,000 taxable income for the year.
That threw thousands of people outside the 35 per cent bracket, incurring the public purse in millions of euro of lost income. Unless I’ve missed it, I am not aware that either of the Finance Ministers who handled the budget – Tonio Fenech who proposed it in 2012 or Edward Scicluna who passed it in 2013 – gave a clear estimate of how much the band change would cost in foregone tax revenue.
That is an omission which should be filled. I would not be surprised if it ran into €80-€100 million. For the reduction affects employed taxpayers as well as those who receive dividends from shareholdings in domestic companies. Dividends are taxed at source at 35 per cent, leaving it to the taxpayer to apply for a refund, if any, depending on one’s marginal tax rate. The shareholder refund, to give it a name, will be at 35 per cent. Against it the bulk of the dividend income will be taxed at 25 per cent.
At a time when the government is committed to cut the budgetary gap as a percentage of gross domestic product, which surely means it must also cut it substantially in absolute terms, the task of the present Minister of Finance to reach that goal has been made that much harder. The same would have happened had there not been a change in government.
I do not feel the Government should implement the second part of the measure in 2014 at another cost of some €30 million
I am surprised that the European Commission, which is tasked with following the trend of country budgets to gauge whether obligatory targets are being met, did not pounce on this particular factor. Granted, a proportion of the foregone revenue put back or left in taxpayers’ pockets will be spent, raising marginal VAT revenue as well as the profits of those who benefit from the increased sales of goods and services.
Even allowing for that, the net foregone income tax revenue over the three-year spread of implantation will still be very substantial and will add pressure on the budget team which has to reduce the gap by a mix of expenditure cuts and revenue increases.
This year sees the first stage of this fiscal irresponsibility. Will it continue in 2014 and 2015? The government will probably feel its hands are tied – a promise is a promise. I don’t agree. Circumstances are a dynamic which has to be taken into account on an ongoing basis.
I do not feel the Government should implement the second part of the measure in 2014 at another cost of some €30 million, with as much still to come in 2015. I feel the Minister of Finance should step back and consider the situation as it is unfolding. Nobody expects him to work miracles and there is a way whereby he can still reach out to taxpayers.
Offer a proper, well-thought-out reform of the income tax system. Give some advantages but denude them of irresponsibility. Of double irresponsibility, in fact. For by expanding the 25 per cent income tax band, the Government has enacted a measure which makes a mockery of the principle of social justice, and of the income tax regime itself.
The Minister of Finance has much to ponder upon. He will probably fight shy of proposing to the government and, if accepted, implementing a measure which might seem less generous for thousands of taxpayers. Nevertheless the nettle has to be grasped. Deliberately foregoing expenditure, and doing so in a context of social injustice, should never be on, let alone in the present circumstances.
The Government would be attacked by the Opposition, no doubt about it. But, once the Minister of Finance and the government explain the reasons for their careful actions, people will understand. What cannot be understood is a continuation of the irresponsible blind charge started by the Nationalist government. Politicians have to consider public reaction, that’s a large part of the game.
Yet they cannot do so by acting like the Gadarene swine. Especially when there is time to change direction in a sensible manner.