1 - 7 March 2001

Economic warnings

The Governor of the Central Bank of Malta, Michael C. Bonello, gave a very clear picture of the real economic situation when addressing guests at Le Meridien Phoenicia – The Malta Business Weekly business breakfast last week.
People in Malta, he said, are living beyond their means and the time of reckoning has come. To some, the Governor’s statement was not something new. However, Mr Bonello said what the government and other analysts knew all along but refused to admit. For too long the government has failed to take the economy in its stride and take firm action. More often than not, as the Governor said, government policy is based on the political climate at the time. Be it local council elections, budget time or a national election, fiscal and economic policy tend to change according to their whims.
Over and over again we have called on the government to bring down the deficit to more acceptable levels. Unfortunately, the government has seen fit to take the more easier way out – taxing the people more and more. This, inevitably, has raised the ire of not only the working class but also the middle class, thanks to taxation on fringe benefits.
What has the government done? Over the past two years, its economic policy has depended more on increasing revenue from taxes and less on controlling expenditure.
One of the major problems, the CBM governor pointed out, is the gap between imports and exports. With few natural resources, we depend a great deal on services and industry, however this is going to require more than just monetary policy. It is going to take a concerted effort from all sectors of society to increase our level of exports. However, though increasing exports is necessary, it is not enough that one company increases its exports whereas the other sectors remain static or even perform negatively. Industry has to become more competitive and seek out new ventures and opportunities.
On the other hand, so much has been said about direct foreign investment yet very little has trickled into the island’s coffers. The Business Promotion Act will hopefully give industry a much needed boost and attract more investment.
On a domestic level, the government has not helped investors either. Instead of encouraging people to leave their money in Malta, the introduction of the 15 per cent tax on Collective Investment Schemes has only “encouraged” people to take their money out of the country. The government has also facilitated this by relaxing foreign exchange controls. While the finance ministry has said that the 15 per cent tax will be on interest, investors – knowing only too well how the government easily changes its mind – fear that this will later on become a tax on capital gains. Is this how the government encourages local investment?
The time of reckoning has come, the governor said. The situation in Malta is very clear. Whether the government is willing to do something about it, however, remains unclear as ever.

Pushed to the edge

The fringe benefits tax guidelines published last week are no more than a detailed re-hash of what the government announced in the last budget. Many people had hoped that the government’s decision to re-examine the guidelines would result in reasonable changes and thus relieve the burden on the middle and upper class.
Unfortunately, there are no real changes in the guidelines except that they make it easier for workers to calculate how worse off they are going to be when they open their paycheques in April.
Anger among the middle and upper management is increasing and they are feeling cheated by a government that has failed to tackle the economy as it should and instead added another burden on those who are already paying more than enough.
We feel that the new guidelines only cause greater uncertainty among the working community with the results that confidence levels go down. Instead of motivating the workforce to work harder, the tax on fringe benefits is having the opposite effect.
Fringe benefits have been around for years. It is true that in some cases there have been abuses and, rightly so, the government is out to curb such abuses. This, however, does not mean that everyone should be meted with the same punishment. As the constituted bodies said in a joint statement last week, they are all in favour of fiscal morality, but feel that the government is acting in a draconian way.
We cannot but agree. Fringe benefits have served to incentivise workers to do that little bit extra. Now, they serve to remind the worker that his paycheque at the end of the month is going to be much lighter.