Caruana banks on tax collection to balance out social outlay and growth

Finance minister Clyde Caruana seals a tradition of Labour administrations that have eschewed tax increases. As long as his taxman collects all that’s due to Caesar... 

Malta’s finance minister Clyde Caruana enjoys holding up not only his red Budget briefcase, but also his red credentials: his social budget remains strong on welfare, benefits, grants and subsidies on utilities that are funded by €500 million in tax money. Yet, the Maltese economy remains shy on raising more funds from taxation, or on super-profits. 

For now, he says, the government can keep reaping the increased revenues from tax and VAT on increased economic growth, but also better tax collection. 

“If we collect what we must collect, it is enough for the government to sustain its activities. Instead of introducing new taxes, first we must collect what we have to collect,” he says of what the National Audit Office has estimated to be over €1 billion in yet-to-be collected taxation from previous years (the historic figure is €6 billion, but 80% of it is uncollectable). 

His solution is an AI-driven system that is expected to give the taxman an “assured 360-degree view” of taxpayers by extracting data from all departments concerning taxpayers and other third-party sources – which includes capital gains and property tax, duty on transfers, VAT, and Customs and Excise duties, as well as social security contributions. 

“We already have our first results in terms of its first stages of collection – in 2024 it will be up and running, and I believe we will be collecting revenues that in the past have eluded us,” Caruana says. 

For the time being, Malta’s continued annual cost-of-living allowances mandated by the State is also guaranteed by its continued economic growth, Caruana says, playing down fears of wage-price spirals by increases in COLA or minimum wage. 

“During the pandemic, company profits were heavily impacted. But the resultant GDP in the post-pandemic phase, rebounded – profits increased – so I expect that in the coming months these profits will absorb rising costs. There is also a limit on how far rising costs can be offloaded onto consumer prices, without the risk of losing customers or competitiveness. Ultimately, consumers and the market adjust their consumption patterns.” 

Caruana hits back at criticism that grants for the most vulnerable workers, carers, or minimum wage increases, do little for the wider middle-class that so many Labour administrations have nurtured. He says that in terms of COLA increases, the €250 increase in children’s allowance, stipends increases, as well as the government’s €350 million spend on subsidised energy, fuels and cereals, middle-income families with up to two cars will be saving €1,300 a year on fuel and €700 on electricity bills. “No tax cut can give you that kind of money,” Caruana declares. 

He adds that working families who will benefit from children’s allowance increases, and who might also be depending on in-work benefits, would not be benefiting from such grants had the annual COLA been untaxed – a demand of most Maltese unions. 

Caruana insists government can only help families and consumers in battling the rough edges of that other major concern of theirs – price inflation – and insists any direct market intervention by the State on price control would be useless. “Really, any sort of action the likes we saw in the 1970s or 1980s would be useless,” Caruana says, harking back to what Labour administrations did in an age of fledgling industrial development by mandating price and import controls. 

“The way we addressed this issue is by helping in any way we can. And I cannot fight inflation with the illusion of being able to control the price – can inflationary pressures from abroad be fought in Malta alone? We have no control on the factors that are affecting the prices of goods that are imported to Malta,” Caruana says. 

And it is not only the war in Ukraine with its effect on cereal prices or the bumpy recovery from the pandemic that worries him. He places his finger on the Middle East where Israel’s merciless retribution in Gaza shows no slowing down. “If that war spills over into other countries, God knows what will happen to the price of oil. Once that spikes, it will penetrate so many markets and products – these wars can be the perfect cocktail for rising energy prices and rising consumer prices.” 

Caruana keeps believing that as long as economic growth keeps revenues buoyant, Malta can withstand higher debt levels while remaining within that Maastricht window of being less than 60% of GDP. It works just like a property mortgage, he says: a big lump of debt you pay gradually over the years but which is never greater than the value of your home. “Back in 2013 we had debt levels of nearly 70% of GDP... yet in 2024, even in the face of international price increases of energy, our debt will be at 55%. After 2026, it will decline towards 50%.” 

Even in the crystal ball simulations pored over by Caruana’s ministry and the boffins at the European Commission put his mind at ease. “Every year we send our long-term simulations to the EC before presenting the budget: under no circumstance can we see Malta’s national debt exceeding 60% up until 2036. That gives me peace of mind, because it means that wealth creation in Malta renders our debt sustainable.” 

But it also means he will retain the €350 million energy subsidy in place until Malta gets a second interconnector that allows it to access lower unit-cost prices on energy, as well as lower energy costs from offshore renewables. Caruana, who is candid about how electoral fortunes are determined by the price of electricity in Malta, says he certainly won’t be inviting the fates of previous administrations – he cites Sant in 1997 and Gonzi in 2008 – by touching energy bills.

“They certainly got their electric shock,” he says of job losses and lower consumption patterns from these energy hikes. “The moment we stop that subsidy, the cost of energy will grow so much our economy will stop. The shock will literally collapse the economy.” 

Even on fuels, Caruana says that simply taking the portion of €80 million in fuel subsidies to turn them out to consumers, would be inflationary. “And that would also mean higher COLA outlays, and once again, we’re locked in that spiral... but the economy works on behaviour, on individual psychology, and on people’s perception. If the government stops that subsidy, it can quickly lead to the perception that yet more spending cuts are in the offing. And when that happens, consumption contracts, and so does GDP.”