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I suspect a number of you reading this will find it strange, if not unfair, that after the budget presented last week, I am choosing to write critically about Tonio Fenech. After all the man is the PN’s rising star and he can take considerable merit for having reduced Malta’s budget deficit below the critical 3% mark. The Maastrict targets have indeed applied the brakes to government’s reckless management of public finances.
Our country’s public finances, in the hands of the Nationalists for 16 out of the last 18 years, had been left to run out of course for far too long. This has resulted in the accumulation of a national debt of close to a billion and a half, even after banking well over Lm300 million from the privatisation of government entities. The Nationalists can never deny responsibility for this. However one merit they can claim is that of having managed to reduce the deficit during the last two years to below 3% without the introduction of any new tax. Tonio Fenech can take a round of applause for that.
However there are two utterances made by Tonio Fenech during a televised debate on the budget that I cannot agree with. The first relates to the primary reason why his government decided to give a tax cut to the middle class while the working class has been left picking up the crumbs! In my mind the primary reason for giving a tax cut should be to increase disposable income in the hope of driving economic growth. However Tonio Fenech thinks otherwise. He said that the scope of the tax cut was to encourage “people to work more”. I am still wondering whether what he meant to say was that he wanted “more people to work”. Although the difference between the two appears semantic, in political and economic terms it is enormous.
If Tonio Fenech and his government are aspiring for people to work even more, then they truly have a blurred vision for this country. The purpose of joining the EU, at least I thought, was to work towards improving both our standard of living and our quality of life. This cannot be achieved by working harder, but by working smarter. Those in power should lead in a manner that enables us to work less not more. Why would anyone vote for a party that wishes the population to work more and more? In political debates both Nationalists and Labourites talk of overtime and part-time jobs as if they were something to boast about. The inability of people to live off one job is a structural weakness in our economy, not a strength.
On the other hand if what Tonio Fenech meant to say was that he wanted “more people to work”, then I concur with the economic strategy. Malta’s most serious structural problem is the very low participation rate in the labour market (52%) compared to the rest of the EU (65%). In order to work towards this goal, targeted tax cuts like pro-rata national insurance contributions are helpful. However what is really needed is the fostering of a business culture that offers workers flexibility in matters such as working hours, place of work and leave entitlement. Further changes in the tax system can act as a catalyst in this regard. The tax benefit for childcare is a good measure, however it is not enough. The Greens believe that government should provide direct financial assistance to develop childcare facilities in each locality.
The other comment made by Tonio Fenech during a televised budget debate relates to an entirely different matter. However the implications of what he said are even more perplexing. Together with Harry Vassallo he was discussing a proposal made by the Greens before the budget. We have proposed that government introduce a small companies’ tax rate of 30%. It is not an original proposal. The UK, for example, boasts of a 19% tax rate for small companies. A reduced tax rate would provide a clear fiscal incentive to SMEs that are truly sick and tired of all the puerile political rhetoric that comes their way, not least the cliché of clichés that “small companies are the motor of our economy”.
In all fairness Tonio Fenech did not disagree with us. He stated that the problem is that he didn’t have the funds to do such a thing. Harry Vassallo challenged him saying that our proposals also pin-pointed where the funds required were to be sourced. We proposed that the tax rate of banks should be raised to 40% from the existing 35%. The economic rationale is simple – banks operate in a very restricted competitive market, unlike small companies that face an onslaught of competition. It is therefore right to have a tax system that discriminates positively in favour of small companies.
This time Tonio Fenech disagreed. Fair enough I thought. However I could not believe my own ears when he explained why he disagrees with us that the tax rate on banks should increase to 40%. He prophesised that if he were to do this the banks would fiddle their books to pay taxes in the UK! I was shocked, perhaps naively, because I never thought government held our banks in such low esteem. How can the finance minister-elect predict such a thing? Even if for a moment I were to entertain his prediction, is he admitting that government is not in a position to combat such a practice?
Was he suggesting that the banks are exempt from the watchful eyes of the Tax Compliance Unit? Tonio Fenech can disagree with us about increasing the tax rate on banks. He will not be alone. However he must find a better reason for disagreeing with us than the one he has expressed.
As for Labour’s position on the budget, I have just two comments to make. It is truly sad that the rash and base comments made by the Labour leader in the days following the Budget speech caused many people to switch off. It is encouraging however that, last Wednesday, he has committed his party irrevocably to the Euro adoption process. For once, in a very long time, all three parties are in synch on a matter of national importance.
Edward P. Fenech is
Alternattiva Demokratika
finance spokesperson
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