It may look and feel like a pre-electoral goody bag but the Budget last week was an exercise in straightjacket accounting.

It is fashionable to speak of the middle class but what about the working class?

With the EU breathing down the neck of member states and with the economy still in sluggish mode, Finance Minister Tonio Fenech had little room for manoeuvre.

In these circumstances it is difficult to please everyone and what the minister chose to focus on gave an indication of the Government’s priorities.

The income tax cut for those earning between €19,000 and €60,000, who will see the top rate drop to 32 per cent from 35 per cent, was the headline-grabbing move. It will be followed by further cuts in the following two years taking the rate down to 25 per cent.

However, some 2,000 workers earning the minimum wage who fall under the single rate tax computation will be paying around €60 per year in tax because the weekly cost of living increase of €4.08 has pushed them into the taxable bracket.

Charles Miceli, a Caritas worker and founder of Facebook awareness group Alliance Against Poverty, says the Budget targeted the middle class and took those on society’s lower rungs for granted. “It has become fashionable for both political parties to speak of the middle class but what about the working class?”

He cannot understand how the tide has shifted from a situation where the minimum wage was deemed inadequate by a Caritas study to that where minimum wage earners will start paying tax.

There are no targeted measures to help those at risk of poverty, he laments. “The increase in children’s allowance is a positive measure but politicians keep harping on economic growth without addressing the just redistribution of wealth.”

Economist Gordon Cordina agrees that the tax reduction measure is related to the implementation of the PN’s electoral programme.

It does not fulfil some “compelling socio-economic need” but it will have positive economic and social spin-offs, he says.

“Whether this measure should have been put second to other priorities at this stage is a point of discussion based on individual and social preference,” Dr Cordina said.

He noted that Budget 2013 follows the same pattern adopted since the introduction of the euro, particularly after the onset of the 2009 global financial crisis.

The first priority appears to have been keeping with deficit to GDP ratio targets, he said, which limits the room for manoeuvre to implement new measures for business promotion and social cohesion.

“It appears that the new measures were limited to what was possible to finance through tax revenues generated either from additional economic growth or which were of a special nature, such as those associated with the collection of tax arrears,” Dr Cordina said.

Referring to previous tax cuts afforded to women returning to work and families with children, he said these measures had specific economic and social targets and were typically financed through increases in specific taxes.

The €10 million income tax cut for middle income earners next year will be financed by higher excise taxes on fuel, cigarettes and cement in what is a tenuous balancing act.

In most areas of public spending, budgets for next year will be frozen at the same levels as this year. Some programmes will see marginal increases in spending while others have actually been slashed.

Recurrent spending would grow by less than three per cent with the increase mostly fuelled by the natural yearly rise in wages, pensions and higher costs for consumables.

But Dr Cordina believes there are three crucial economic points where the Budget will be tested: whether the deficit and debt targets will be achieved; whether the projected increase in capital expenditure crucial to stimulate growth will be implemented after the slippage of recent years; and whether the proposed measures will be implemented in an efficient and effective manner to give taxpayers the best value for money.

It is a tall order in view of the economic uncertainty across Europe and to a lesser extent the onset of a general election when business activity tends to slow down.

But on Budget day as some followed the finance minister on their televisions, business analyst John Cassar White had his eyes elsewhere.

On the same day the EU put Malta’s economy under scrutiny and included the country in its alert mechanism report.

“It may not mean much for the man in the street, who will look at the direct impact of the measures. But by taking a longer-term view of the economy, the picture is more sober and should temper the enthusiasm,” Mr Cassar White says.

He says the country still lacks a long-term economic plan to address key issues highlighted by the EU’s alert mechanism such as the burgeoning debt.

According to the Budget debt is expected to reach 71 per cent of GDP, way above the EU target of 60 per cent, by the end of this year. It is forecast to drop slightly to 70 per cent next year and 69 per cent in 2014. The projections show that debt will drop to 67 per cent in 2015.

“Debt is pretty much a red herring. We often hear that it is not of concern because it is domestic debt and people have always responded well to Government stock issues. But the question is whether the cost to service the debt is sustainable,” Mr Cassar White says.

At a time when the Government has to spend more money to improve the road infrastructure and invest in energy projects such as the interconnector cable, having sustainable debt levels is important, he added.

Budget measures at a glance

• People earning up to €60,000 will see their tax rate drop to 32 per cent next year. The rate will drop further to 29 per cent in 2014 and 25 per cent in 2015.

• The minimum rate of children’s allowance will rise by €100 and €177 for minimum wage earners.

• €300 allowance to the elderly extended to those aged 78 and over.

• 30 per cent cut in registration tax on Euro 5 vehicles and an increase of 10 per cent in tax on Euro IV vehicles. Tax is to be removed or reduced for motorcycles.

• Car scrappage scheme reduced.

• Feed-in tariffs for PV users who sell electricity reduced, but term is extended.

• Reduced Gozo ferry fares for those who travel in winter and stay in Gozo for at least one night.

• Duty on petrol, diesel, up by 2c per litre.

• Average price of cigarettes to rise by 20c to 30c per packet.

• Property buyers to pay less stamp duty on the purchase of their ordinary residence.

• Stamp duty on property inherited from parents removed.

• Stipend introduced for those who do voluntary work after tertiary education.

ksansone@timesofmalta.com