Veteran economist calls on Labour to ditch “foolish” income tax cuts

Karmenu Farrugia makes his case for a ‘mini budget’

The European Commission could have been convinced not to start the Excessive Deficit Procedure against Malta if new Finance Minister Edward Scicluna had presented a "mini budget," contends veteran economist Karmenu Farrugia.

The mini budget should have spelt out clearly how the government intends to reduce the deficit from the 3.3% at the end of 2012 to 2.7% by the end of the year as projected in the budget approved in April.

In his first budget, Scicluna retained the measures contemplated by his predecessor Tonio Fenech in December last year but revised the deficit target from 2.2% to 2.7%.

But Farrugia insists that retaining the framework of this budget is not wise.

One measure which should be reconsidered is the reduction of the highest tax rate from 35% to 32% in the next year and to 25% in the next three years, for those earning less than €60,000 should be scrapped.

"I simply do not agree that we have reached a state where we could reduce the top rate of income tax... while there is a strong case for widening the bands, it is clear that current circumstances do not permit a reduction of revenue."

Moreover, the reduction of the top rate of income tax is not conducive to economic growth, because this will not result in a substantial increase in spending.

"Simply any increased revenue from taxing increased spending will not make up for the loss of revenue."

He notes that while an increase in the minimum wage will contribute to growth as these low income earners are likely to spend all or most of their income, high income earners are more likely to save than spend their increase in income.

"The decision to cut the top rate of income tax is a political issue and has no positive economic bearing... Nobody is not investing in Malta because of the top 35% income tax rate."

Describing the tax cut as "foolish" in the present circumstances, he insists that such a reduction in taxes can only be contemplated after the budget is balanced or more so if Malta has a favourable balance.

Farrugia argues that had the government taken over in October it might have made sense to carry on the budget of the previous government for a couple of months, but it does not make sense in the present circumstances to carry on the budget made by another Minister for another year.

He also points out that circumstances have changed drastically because the previous government had ended 2012 with a deficit of 3.3% instead of the projected 2.3%. 

Contributing to this increase in the country's deficit were a number of collective agreements with civil servants. The changed circumstances strengthened the case for a mini budget, contends the veteran economist.

"This is like a Minister accepting to drive someone else's boat for nearly a whole year. It is also a question of pride for Edward Scicluna."

Farrugia is confident that Scicluna, whom he praises for his competence, would have made a very convincing case in Europe had he presented a mini budget. "The fact that the commission has started the excessive deficit procedure means that Scicluna failed to convince the commission otherwise," Farrugia says.

He also presents the argument for a mini budget as one of accountability.

"The citizen has a right to know how the government plans to decrease a deficit of 3.3% to 2.7% by next December."

He describes the decision of the EU to commence the Excessive Deficit Procedure on Malta as a "big slap on the face" and something which cannot be taken lightly "as it will mean having EU officials checking our every move".

Farrugia also questions the legacy of the previous government.

"It is impressive how PN governments were not able to reach their own targets."

According to Farrugia, Edward Scicluna's choice is limited between increasing revenue through new taxes, which is unlikely for political reasons or decreasing expenditure. Postponing capital expenditure projects could be one option, but Farrugia warns that this would have a negative impact on growth due since big projects have a multiplier effect on growth. 

This leaves the government no choice but to cut its recurrent expenditure.

"It is obvious that the previous government used to over spend... but would a decrease in recurrent expenditure suffice to bring down the deficit from 3.3% to 2.7%? This is why a mini budget was necessary to explain how this can be done."

More in Budget 2013
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What hurt me is that a tax payer who payed all his life his N.I. had his pension taxed and frozen, and the government know of his income penny on penny, and we have those that have been caught cheating saying they forgot to declare, or it is daddies, or doing service for charity, or I want to be payed with no cheques. I always said we live of those living upstairs and those living downstairs. Why a government for the people give preference to those who know how to hide their money is beyond me?
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Emmanuel Mallia
During the election campaign, both parties were like Christmas father , promising all but positive glittering things. None of them mentioned taxes or other hardships. Strange !!!!
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this guy is crazy,yes the PN MOTTO high uttility bills, high tax rates, etc.and if you dont pay its off to prison or six years trying to proof that you are right in our law courts. Whilist Banks do not help businesses of any size any more, companies are struggling to keep up with their expensives and also trying to keep all their employees happy. Were is the E.U. in all this ? God only knows. Were are the millions that the E.U. are giving the Maltese people? Also were is the Malta Enterprise in all this ?? just words words and words!!
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@Pacam. I think that the thunder and lightning is a figment of your fertile imagination. Karmenu Farrugia is just expressing an opinion, so what's the big deal?
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The lowering of the highest level of income tax only means that the fat cats pay less tax while other taxes have to be raised to make good for the reduced government income. The highest level of income tax should be raised not lowered and the lower brackets increased because there are many more people in the lower tax brackets who would have more money to spend. According to Prof Lino Briguglio in the 1980's the Marginal Propensity to Consume was, if I remember correctly, some 85%, meaning that for every €100 a worker gets, €85 are sent. This does not apply to those who earn millions.
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@Pacam....ilu t-thunder and lightning on the horizon.....madwar ħames snin jew aktar....għax taħt Gonzipn tiegħek qatt ma ħadna ruħ. Għadna nbatu l-konsegwenzi u minn jaf kemm għad irridu ndumu nbatu sakemm nieħdu naqra ruħ.Istħi tkellem wara l-fjask li ħalla l-gvern tiegħek!
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Paul Pandolfino
Economist Farrugia failed to tell us that up to the election the budget had the approval of the EU. The trouble started after the election which made the EU change its mind. Mr Farrugia should have dwelt about this in his article. But perhaps he did not want to hurt his own party or Joseph.
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@ pacam Mhux ahjar taraw kif ser thallsu lill haddiema li jahdmu mal PN ghax ilhom xhur ma jaraw sold milli tigi hawn u toqghod minghalik trid tbellallna ir-ross bil labra? Kemm hsibtna cwiec? L- anqas il- finanzi tal partit li huma taghkhom ma hadtu hsieb ahseb u ara tal- pajjiz!! Hallina.
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A very sensible suggestion. Here in Spain one of the many reasons why we are in the mess we are is because Governments played around with the tax bands to please the electorate. Maltese would prefer to keep the present tax percentages for a while rather than face stiff EU measures which will hurt everyone.
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You don't have to be an economist to see the common sense in Mr. Farrugia's arguments. Unfortunately, common sense is a quality which politicians in the two main parties do not seem to process.
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Mr.Farrugia,the citizen has the right to know, how Malta in 23 years sold nearly everything, and have over 5 billion debth that can never be paid.
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Is this news item going to serve as a first hint for a U-turn towards another string of unkept promises?
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I agree 100%. Continue to fleece the hard-working force, so that I can continue to live by their taxes. After all Malta is "Taghna lkoll'
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Agree with this gentleman who knows what he is talking about. Labour did promise to keep the budget's , prepared by gonzipn, frame work but surely it did not expect the financial shortcomings it found . This income tax decrease should be left for the time when the country could handle its finances better which I am sure with experts like Profs Scicluna can be achieved in a short time.
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Proves that AD were right from day one. Pity that the PNPL assess all political and economic decisions on such a short-term perspective, on the number of votes they stand to gain or lose.
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Thunder and lightning on the horizon. Karmenu Farrugia was one of the followers of Malta Taghna Lkoll in the pre-election campaign, yet he is now censuring and denigrating from within the Labour boudaries, the moves and decisions being taken by the present Minister of Finance.