One of the salient points of the budget speech was the changes in the tax bands. It needs to be stated this was not presented as a tax reform and in fact it is not a tax reform. Tax reform does not mean a change in the tax bands, which may lead to an increase or a decrease in the tax take, but a change in the principles upon which tax is collected.

This would mean a change from direct to indirect taxation and the other way round, or a change from a progressive tax to a regressive or proportional tax and again the other way round, or the introduction of a new tax that would replace an existing one.

The objective of the changes in the tax bands is fairly evident - that of increasing the purchasing power. It is an evident signal that the fiscal tightening that we have experienced in the last years will stop getting tighter and some loosening may be expected if the trend in the fiscal deficit as a percentage of the gross domestic product continues its downward movement.

The changes in the tax bands have another dimension which is worth looking at. This relates to the gap between labour costs and take-home pay, measured in terms of the difference between the two figures as a percentage of the former.

A few months ago, The Economist published comparative data on such a gap for a number of European countries. The data is based on average earnings for a single person without children. The data shows a range between the 34 per cent of the United Kingdom and the 56 per cent of Belgium.

This implies that Belgian employees take home 44 per cent of what they cost their employer, while British employees take home 66 per cent of what they cost their employer.

It is significant to note that the gap between labour costs and take home pay as a percentage of total labour costs for several countries lies between 42 per cent and 52 per cent. In fact Denmark is at 42 per cent, Italy is at 46 per cent, Austria is at 47 per cent, Sweden is at 48 per cent, France is at 50 per cent while Germany is at 52 per cent. The lower the figure would mean the higher the amount that the employee takes home from total labour costs. And what about Malta?

The Economic Survey published by the government together with the budget speech and budget estimates, shows that average weekly earnings per employee stood at Lm127.53 for the first six months of this year, giving annualised earnings of Lm6,631. Total labour costs would amount to Lm6,631 plus the 10 per cent social security contribution paid by the employer, that is Lm7,294.

Take-home pay, using the new tax bands, would be Lm6,631 less the 10 per cent social security contribution paid by the employee and less Lm620 payable in income tax. This would amount to Lm5,347, that is 73 per cent of total labour costs. Hence the gap between take home and labour costs as a percentage of total labour costs amounts to 27 per cent in Malta, just less than half the level of Belgium and seven percentage points less than the level of the United Kingdom.

Putting it crudely, a Belgian worker would need to earn twice what is earned by a Maltese worker to achieve the same absolute amount of take home pay.

Using the same labour costs figures, that is a total of Lm7,294, and Lm6,631 as annualised average earnings, while keeping to the current tax bands, take home pay would work out at Lm5,185, that is 71 per cent of total earnings. This represents a 2.7 per cent increase in take home pay. The gap between take home pay and labour costs as a percentage of total earnings would have been 29 per cent using the current tax bands.

Two important considerations emerge from all this. First, if the government were to pick up, in terms of income tax and social security contributions relative to gross earnings, the same amount that other governments do, we would certainly not be talking of a fiscal deficit. The downside to this would be the reduction in the purchasing power. Moreover, it would always be better for consumers to spend money in the economy, rather than governments.

The second consideration is crucial. Investors consider Malta's cost base to be attractive compared to the productivity of the employees. Part of the reason, why this cost base is low is because of lower wages compared with western European countries and part of the reason for these lower wages is evidently the lower tax take by the government on income.

The moral of the story is that a lower tax take means increased competitiveness and, by implication, the elimination of tax evasion brings a lower tax take and hence increases competitiveness.