25 November - 1 December 1999

Ideological barrier to income tax rise broken

by Anthony Manduca

The increase in income tax announced in this week's budget represents the first time since 1987 that direct taxation has gone up in Malta. Finance Minister John Dalli said on television on Tuesday night that the Nationalist Party never had an ideological attitude towards income tax and that a balance had to be reached between direct and indirect taxation. However it is a fact that when the Nationalist government substantially reduced income tax in 1995 it made a point of saying that indirect taxation, such as VAT, was fairer than direct taxation because it was a tax on consumption and therefore there was an element of control involved.

Since then there seemed to be a general consensus in the country - even during the 22-month Labour government - that income tax rates should not be raised. Even though Alfred Sant's government introduced some very harsh austerity measures, such as sharp increases in the water and electricity rates, it never increased income tax. During the last electoral campaign the Nationalist opposition accused the Labour government of secretly planning to increase income tax if it was re-elected. The irony is that it was a Nationalist government that increased income tax on a sector of the population that are its natural supporters: the middle classes. Anybody earning over Lm6,000 can be expected to pay between Lm25 and Lm250 per year in extra income tax as from next January. Although the general feeling among the middle classes is that the deficit has to be tackled, most people were very surprised, even shocked, when they heard that a Nationalist government, which had radically cut income tax in 1995, had increased income tax.

It is the middle income sector of the population which has been most affected by the measures introduced during the budget. Apart from paying more income tax, there are also the other indirect taxes to deal with such as five per cent VAT on telephones, 15 per cent VAT on petrol and diesel and the increase in the price of cigarettes to Lm1 per pack. True, the government has promised not only a Lm1 weekly pay rise but a one-off Lm10 per person payment in January. However, the middle classes are not usually impressed by such grants which are really given to muzzle trade unions and prove to the lower income groups that the government has a social conscience. This government has never claimed to belong to the Thatcherite school of thought and it has proved it during this budget. The main burden has definitely fallen on the middle classes and there was no emphasis at all on cutting government expenditure, only on increasing revenue through more taxes. However, the one measure that the middle classes will surely welcome is the removal of the tax on private health schemes which is a Nationalist Party electoral promise.

Business as a whole generally welcomed the budget because it tackled the problem of the deficit in a substantial way and because there were no burdens imposed on the business sector. What it is concerned about is the potential negative effect on the purchasing power of the average citizen, especially the middle classes who spend more, which could rebound negatively on the business cycle.