25 November - 1 December 1999

Bitter medicine

There is no doubt that this budget was aimed principally at reducing the country's financial deficit, which everyone agrees needs to be tackled.

This week's budget presented by Finance Minister John Dalli has both positive and negative aspects. The most positive aspect is that there has been quite a bit of progress made in the battle to reduce the deficit and this is due mainly through the re-introduction of VAT and a more efficient collection of income tax arrears. Last year's budget deficit of 11.1 per cent of GDP has now been reduced to 8.6 per cent of GDP. This is positive and such a trend must continue.

The White Paper on privatisation presented during the budget speech is a step in the right direction. Privatisation is not only good for the Treasury - although the proceeds from the one-off sale of government owned companies cannot be used to reduce the structural deficit, it also reduces the size of the public sector, creates more efficiency and is usually ultimately beneficial to the consumer. The government has proposed that privatisation proceedings start immediately with regard to Malta International Airport, Malta Freeport, Public Lotto, the Libyan Arab Maltese Holding Company and the Bank of Valletta. It has also made it clear that special attention will be given to Maltacom and Air Malta in view of their privatisation via strategic partners or other types of models of sale. Naturally, the type of privatisation required depends on each individual company but in the case of Bank of Valletta, Air Malta and Maltacom, we strongly recommend that privatisation is brought about through a strategic partnership so that such companies would be able to compete better in the global economy.

In an effort to continue the downward trend in the country's fiscal deficit, the government has introduced quite a dosage of bitter medicine. It has increased the price of cigarettes to Lm1 per pack, imposed the full VAT rate on petrol and diesel and a five per cent VAT rate on telephone bills, announced its intention to remove the subsidy on bread, increased income tax for those earning over Lm6,000 annually and imposed VAT on locally produced alcohol drinks. These measures will no doubt be unpopular with the average citizen; after all, nobody likes paying more taxes and despite the Lm1 weekly wage increase and the one-off Lm10 government payment per person in January, the average lower to middle income earner is bound to be financially worse off next year.

Are these tax increases justified? While indirect taxes are a modern way of collecting revenue because they are a tax on consumption and can therefore be controlled, increased direct taxes demotivate people and usually hurt the middle classes. It is therefore regretful that this government chose to raise the income tax rate. Imagine what the reaction would have been had Alfred Sant's government decided to increase income tax! It would have been accused of returning back to the bad old days of socialism. Do not the middle classes already pay enough taxes? While accepting that certain taxes had to be imposed or increased to reduce the deficit, it would have been better had income tax not been raised and a greater focus made on indirect taxes, especially on luxury goods and on fighting tax evasion.

A higher income tax rate is also a bitter pill to swallow because of the fact that the government made no mention of any intention to reduce the size of the public sector, with the exception of its planned privatisations. So while an over-staffed civil service and an unproductive Malta Drydocks get substantial pay rises, the middle classes are expected to pay more taxes to finance such increases. It would have made more sense had the government also focused on cutting expenditure through planned public sector downsizing, instead of concentrating solely on increasing revenue. Furthermore, why were there no incentives given to businesses to encourage economic growth and job creation? Privatisation is one way to achieve this, but is this enough?

Unfortunately, no fiscal incentives were given in this budget for private pension schemes as the commission on the welfare gap has not yet presented its recommendations to the government. One hopes that the government will take the necessary measures to encourage such schemes as soon as the commission's report is out.

The decision to abolish the tax on private health schemes is very positive and is an acknowledgement of the important role that the private sector plays in the health sector. The reduction on the duty on the transfer of property is also to be welcomed.

The overall thrust of the budget is aimed at reducing the budget deficit and this year progress has already be made in this regard. That is good news. However, it would have been preferable had income tax not been increased and there was more of a focus on encouraging economic growth and on reducing government expenditure.