Finance Minister Edward Scicluna. Photo: Darrin Zammit LupiFinance Minister Edward Scicluna. Photo: Darrin Zammit Lupi

The Government’s deficit reduction plan makes all the right noises but “the devil will be in the detail”, according to economist Gordon Cordina. He said the strategy and objectives outlined in the plan submitted to Brussels for scrutiny followed the right direction.

“The plan reiterates the shift to indirect taxation, mentions third pillar pensions, stresses lower energy costs and insists on expenditure cuts, all issues the European Commission would want to hear,” Dr Cordina said.

However, the more important thing was how the objectives would be implemented when the Budget was announced, he noted.

Two documents submitted by the Finance Ministry to the European Commission outline in broad terms the direction the Government will take in the forth-coming Budget and beyond.

Although the plan does emphasise higher revenue from indirect taxes to make up for the widening of income tax bands, it does not indicate which indirect taxes will be increased or introduced.

It also does not specify what measures will be taken to spur growth and employment, although the cost is put at €40 million.

The plan is slightly more detailed when it speaks of reductions in government employment where the intention is to recruit only two people for every three who retire.

Dr Cordina said the Government’s intention to cut expenditure, particularly by reducing the wage bill, was commendable but it also depended on the ability of the private sector to grow and create jobs.

He insisted the success of the plan depended on what Budget measures were introduced to stimulate private sector growth while cushioning any negative impact on the most vulnerable.

Economist Lino Briguglio believes the reduction in income tax could stimulate the work effort and investment. It may also result in reducing underground economic activities.

Prof. Briguglio said revenue from indirect taxes could increase without the need to raise tax rates if changes in income tax lead to more consumer spending.

However, he noted there was social concern linked to the two-pronged move to cut income tax and shift the onus on indirect taxes.

Income tax reductions benefited taxpayers with high and middle-income earnings more than those with low incomes, he explained, adding that consumption taxes were considered regressive because lower income households tended to pay a larger share of their income on them.

“The ministry is aware of this and I presume some sort of remedial action will be taken,” he added. While popular focus may be on taxation changes, Prof. Briguglio said what struck him most in the economic partnership programme submitted to the EU was transparency in policymaking.

It depends whether there is the political will to go ahead with unpopular decisions

“The enactment of a Fiscal Responsibility Act to be presented in Parliament will render fiscal policy more credible and the consolidation of the various government revenue departments into one authority was likely to reduce tax evasion,” Prof. Briguglio said.

But on a macroeconomic level, Prof. Briguglio said cutting the deficit to below three per cent this year, ahead of the target set by the European Commission, would strengthen Malta’s credit rating.

Controlling the deficit and debt should be the overriding priority, according to Malta Employers’ Association director general Joe Farrugia. This had to be done without slowing down the economy. A balance, he conceded, was difficult to achieve.

“It depends on the measures that will be implemented in the Budget and whether there is the political will to go ahead with unpopular decisions despite the pressures that may abound,” Mr Farrugia said.

A big chunk of public expenditure related to the public sector wage bill and, over the past 12 months, government employment increased by 1,000, he noted. Even if the plan indicated yearly reductions of 500 employees from the public sector, there was no indication yet of this happening, Mr Farrugia said.

“But a business-friendly environment will help give the Government peace of mind that jobs will be created to make up for less employment in the public sector while increased economic activity will ensure more revenue to sustain public expenditure,” he said.

ksansone@timesofmalta.com

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