Fiscal council wants judicious spending of cash from golden passport sales

Fiscal advisors tell government to carry out structural reforms now while economic growth outpaces eurozone average

In the first nine months of 2015 only around 40% of the expected revenue from the IIP for 2015 was received.
In the first nine months of 2015 only around 40% of the expected revenue from the IIP for 2015 was received.

The Malta Fiscal Advisory Council has advised the government to take advantage of its positive growth rates – 3.6% projected for 2016 – by cutting further on spending and implement much-needed structural reforms in health and education.

It also called for a judicious spend of the millions being reaped from the sale of citizenships through the IIP, the Individual Investor Programme.

While 70% of funds paid to the golden passport scheme – the Individual Investor Programme – are being channelled to the National Development and Social Fund rather than used to finance the fiscal deficit, the IIP revenues still feature as part government revenues when it comes to calculate the deficit.

The bulk of the increase in revenue from discretionary measures resulted from the Individual Investor Programme – around 25% of the total revenue increase in 2015.

But the data made available indicates that in the first nine months of 2015 only around 40% of the expected revenue from the IIP for 2015 was received. “Nevertheless, the authorities ascertained that the annual estimate is considered attainable as it is based on reliable information on the submitted applications,” the MFAC said.

The council called on the government to evaluate how best to utilise the IIP funds, particularly to ensure that such funds are used to finance the acquisition of financial assets, rather than to fund direct expenditure, as this could have implications for the future fiscal balances.

Structural reform

With Malta headed for a balanced budget by 2019, the MFAC, which is tasked to oversee government budget projections, says the current benign fiscal environment should also usher in improved health care services and higher nationwide educational attainment.

“These reforms are deemed important not only for welfare purposes but also because they contribute to sustain the country’s future potential output. The same applies with respect to the necessary initiatives to implement transport reform and boost labour market activity further.”

“The more benign macroeconomic conditions, which translate into higher tax revenues, should be channelled into a faster decline in the fiscal deficit rather than to finance additional expenditures… strong revenue growth provides an effective opportunity to address more forcefully the structural deficit problems and thereby prepare on a sounder basis for future demographic trends,” the MFAC said.

Diversification of tax

The MFAC said that a new environmental tax on tourism – a 50c per bed night – would bring a more diversified tax base while Malta’s tax burden on labour grows smaller: Malta has the lowest tax burden on labour among eurozone countries.

But the council called attention to the government’s increased use of tax revenues levied on potentially volatile tax bases, such as profits of international companies based in Malta.

Such companies use Malta to establish parent companies to shift their profits to Malta and claim refunds on dividends that erodes their tax base, a system now under attack by the European Union’s lawmakers who want to target so called ‘base-erosion and profit-shifting’.

“This pattern has extended further, since the revenues generated from the IIP can also be considered to be to some extent volatile in nature, as these depend on the yearly applications received and the speed of processing of such requests.

“While the MFAC acknowledges that to date the actual performance of these specific revenue components has been very positive, such revenues may in future become unstable and could scale back suddenly.”

The MFAC also said the government should consider whether Malta’s low property taxes – buyers and sellers are only taxes at the time of property transfers – are equitable, and whether more revenue should be generated by taxing immovable property.