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Holding the country’s purse strings

Video: Mark Zammit Cordina

In eight days’ time, Finance Minister Edward Scicluna will announce the Budget for 2015. Vanessa Macdonald asked him about the impact of the measures in the last Budget

The deficit target announced in Budget 2014 was €140 million. According to the National Statistics Office, by September this year it was already €284 million, in spite of the fact that revenue was up by €171 million. What went wrong?

My own calculations, based on actuals against estimates, show we are on track; it would be a disaster if we did not reach those targets.

The NSO January to September expenditures could have gone higher than expected – because of public transport, for example. But accrued revenues are about €52 million higher, which is more than the estimated deficit reduction from 2013. So we are on track.

Also the NSO September deficit figure of €284 million is €12 million worse than last year. But when you accrue the €64 million fuel tax revenue due for this year, you get the same result: a €52 million improvement over last year. Yes, we are still aiming towards a deficit of 2.1 per cent of GDP.

There is no need to squeeze the economy more than necessary. Once we are on track we will not consolidate further as that would be an austerity approach

But that is because the GDP went up, not because you are any closer to balancing the Budget.

The pressures on increasing expenditure are and will always be there. One has always got to push or give depending on the revenue outcome. There is no need to squeeze the economy more than necessary. Once we are on track we will not consolidate further as that would be an austerity approach.

One of the targets was to raise tax revenue by €188 million, which you succeeded in doing – but non-tax revenue was supposed to go up by €52 million from the Individual Investor Programme.

We are not counting on the IIP this year. We factored in €15 million – revised to €10 million – and we expect to get that. The forecast for 2015 is €50 million, but that is still much less than the programme will generate overall.

Are we any closer to deciding how this money is going to be used?

First the money has to come in! The Budget will take up a small part of this but the rest will go to a wealth fund which will be run by an authority or agency to be announced by the government. Many countries have similar wealth funds.

You have been asked many times already… How are you going to make up for the money that has not yet come in from Shanghai Electric and Electrogas?

That investment is Enemalta’s domain. Our concern is that Enemalta pays its dues to us: €150 million in excise duty. You must remember that the revenue has actually been collected by this enterprise – and because of the problems with liquidity, which everyone knows about, was not passed on. It is not as though we have fallen behind in our taxation targets. The excise duty will be passed on – and before the end of the year.

You make it sound as though there is no problem and that it is just a paper transaction.

No, it is very serious. We are not taking this lightly at all. But the duty has been collected and they will pass the money on to the government once the deal goes through.

Again, you have been asked how you will make up for the €50 million once tariffs for business go down in March since generation plans have been delayed.

We are not patching things up as we did in the past, where we looked at Enemalta’s debt, tried to tinker with the tariffs, and then worried about what to do next. There is a plan. Yes, it has been delayed – fine – but it is still there and it is still realisable. The plan will result in huge savings on oil. There was so much more waste than anyone realised. It is like having a gas-guzzling car from a Hollywood film that you plan to replace with a small, very fuel-efficient car.

In our Budget, we are going to make them an offer which is too good to refuse

But you will not save money until you get that car…

There will be big savings for 20-25 years. The government has every right to bring the benefits forward by one year, so that industry can breathe a little bit easier and become more competitive. We have explained it to the IMF, the European Commission and credit rating agencies and they never raised any issues. Of course, everyone is interested in seeing the deal go through. But the plan is realisable. It is feasible.

We were recently accused by the Commission that we could have brought in €241 million more in 2012 – but you say that this was in fact only €34 million in 2012 and €11 million in 2013. You claim it is due to inclusion of the iGaming industry.

Last year, we were among the most efficient group so I was astounded that they ranked us at the bottom! These things do not happen in just one year. We did our homework and found that the Commission inputted an enormous sum based on an industry – iGaming – which is exempt until 2015. There cannot be tax evasion on an activity which is tax exempt! Do we have tax evasion? Yes, definitely, especially where there are small traders doing work in the home, and we are addressing this.

There was an exercise under way to look at VAT and inland revenue cases realistically and once and for all come up with a figure for what is actually due, whether because there are inflated estimates or because amounts are simply not recoverable. Are you going to bite the bullet and write off uncollectable amounts?

It is up to the Auditor General to estimate these potential revenues – which amount to €1 billion in all. This is an outrageous sum.

As you said, some of it should have been written off. Companies do that but the government does not. I am not going to ask what the Auditor General should be doing. Our concern is that we are reasonable but that we collect arrears. This is why the revenue from VAT has gone up.

More revenue is being generated from tax as a whole but the share from VAT is increasing at a faster rate than economic growth. We have record revenue from VAT of 8.1 per cent, which shows that we are improving our efficiency. The same for income tax.

However, we need to be well organised and the biggest problem is the fragmentation of (our revenue-collecting) departments. We found a plan for a merger but I cannot see any light at the end of the tunnel. I was promised a number of things – such as software – but there are a lot of excuses and they have not been delivered.

Cyprus is doing the same thing, and is being advised by the IMF. So I have asked the IMF to come over next week to give us advice so that at least we can say where we stand.

The government just announced that the subsidy for public transport is going to more than double from €10 million to €23 million.

We have to decide. Do we want to give a token amount to public transport, just enough for it to survive? Or should we really invest in order for transport to be of better standard, without cutting routes and increasing fares – thereby shifting the burden on cars. Some might say it is outrageous and high but in spite of the heavy taxation on motor cars, there is still congestion. I said – and the Prime Minister agreed – that congestion is going to hinder our economic growth.

Let us look at some of last year’s measures. The catchphrase was “let us make work pay”. Did you succeed?

Yes. We had 450 people on unemployment benefit who have found a job. When you factor out those who would have found a job anyway, there were 250-300 who moved into jobs. This means we are saving 40 per cent of the benefits they would have received.

We are going to extend it to other people on social benefits – clearly not disability pensions or any benefits of that sort – but those given to families who lack income because they do not work. I do not speak of lazy people. I think they are rational: it is in their interest to stay on benefits because they would be worse off it they got a job. In our Budget, we are going to make them an offer which is too good to refuse.

You earmarked €3.8 million of free childcare to try to encourage more female participation. Was that successful?

The take-up was more than double our estimate. The more successful, the higher the cost for the government, but it is an investment. This is where economic growth is coming from: jobs which generate more revenue, better national insurance contributions. And there are benefits from the family if its members are working: there is pride and psychological satisfaction. I think it was money well invested.

Air Malta privatisation is not on our radar screen at the moment

Is it women who were already working and paying for private childcare who obviously preferred to get the service free – or did you actually entice women to return to work?

There was excess capacity which was taken up – these were new people going into the workforce.

Capital expenditure was supposed to increase by €59 million, part of which was to be spent on the Kappara flyover and breakwaters in Delimara and St Paul’s Bay. What happened?

You are talking to the minister of finance. We allocate the money because we believe in it but then it is not within my remit.

Last August, during an interview, you said there was to be “no more selling of the family silver”. But now it looks like Air Malta might need a strategic partner if it is to survive. Are you going to privatise?

We have to hope and pray that the restructuring succeeds. I know how the Commission works and this is the last chance to get it right. Obviously there are problems, in the sense of the Libya crisis where it lost money, but we rely on the management to deliver. We are not saying that we have given up on Air Malta.

But will you or won’t you consider privatisation?

This is not on our radar screen at the moment.

Joseph Muscat said that COLA of 58 cents is not enough. Has this become an annual bonus instead of a social mechanism?

COLA works well when you have inflation of about two per cent, in other words, normal times. But it does not work well in extremities. When there is high inflation and COLA is high, it hurts competitiveness – and that is when there are calls for productivity to be factored in.

But the unions are upset when inflation is low. This year’s experience has opened the eyes of both the unions and the employers to the possibility of renegotiating. If they want to, the unions can remove those extremities and make up for it at the top end and the low end. It is not for me to get involved. Those who would have been hurt by high inflation have gained not only 58c but €300 or €400 worth from the inflation that we did not have.

But Joseph Muscat said that this was not enough…

We will have measures to address that issue.

Which are what? Will you give more than 58c to certain categories of society?

We are talking about people on benefits, pensions, students and minimum wage earners.Inflation will not compensate them for the fact that the economy is growing. And there is also the productivity part – which the government will address and compensate.

What about Budget 2015? Why raise indirect taxation?

We are the member state with the lowest tax on labour and that is to our benefit. We are guarding that really well.

At the moment the ratio of income tax, indirect tax and national insurance is 2:2:1. Income tax is galloping further than indirect tax so we want to tweak to ensure that the balance is kept.

Income tax rates were reduced over the past years. How is revenue ‘galloping ahead’?

Income tax has the tendency to increase more than the income earned. An excise tax – say on cigarettes or alcohol – works differently (in economic terms) because it is a fixed amount. Even if the cost of cigarettes or alcohol goes up, excise remains the same. In the UK, excise tax goes up automatically by the consumer price index plus two per cent. We do not do that here. We believe the revenue is coming from the growth of the economy and we do not need to increase rates.

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