Taxes were reduced for the first time in Budget 2007. In this year’s budget plan, the government’s focus shifts to the family and also plans to reduce the fiscal deficit even further. Just before the presentation of Budget 2008, Parliamentary Secretary in the Finance Ministry Tonio Fenech tells Francesca Vella that the government will share economic benefits gained, although the main aim is to invest further, particularly in the education sector. However, he did not exclude further fiscal relief...

Over the past year, the country’s fiscal deficit reduced from Lm70 million / EUR163.1 million to Lm50 million / EUR116.5 million and the government plans to reduce that by a further Lm20 million / EUR46.6 million over the forthcoming year. The plan is to eliminate the fiscal deficit completely by 2010 – “gradually, soundly and prudently” in Mr Fenech’s words.

The parliamentary secretary explained that the government’s three-pronged approach – maintaining financial stability, investing in the economy and sharing economic benefits with citizens – was aimed at balancing all factors in a manner that truly creates a financially stable environment. Certainly not an easy balancing act.

Despite the country’s financial stability and the fact that taxes have actually been reduced, it cannot be denied that people still feel that the cost of living is on the increase, particularly due to the recent rise in the food price index as a result of the increase in the international price of cereals.

This will be taken into consideration in this year’s budget and the cost of living increase will be between Lm0.50 and Lm0.75 / EUR1.16 and EUR1.75 per week.

Moreover, even though tax bands were revised last year, Mr Fenech did not exclude the possibility that they could be adjusted further this year.

“People have asked us to look into the children’s allowance system and pensions among others. Clearly, this cannot be done in one budget. It is a bit of a balancing act,” he said.

Mr Fenech said he could not agree with such a “drastic” proposal like the one put forward by the Malta Chamber of Small and Medium Enterprises (GRTU) for a radical income tax relief that would cost Lm40 million / EUR93.2 million.

As for the surcharge on utility bills, the parliamentary secretary said the government did not want to fool people.

“When and if it is possible, the surcharge will be reduced further. The government is already carrying half the burden.

“It is important to remember that should the surcharge be cut by half, as Opposition Leader Alfred Sant has proposed, the Lm25 million / EUR58.2 million involved to implement such a measure would have to be funded from some form of other tax.”

Similarly, doing away with VAT on vehicle registration, which Labour members of the European Parliament Joseph Muscat and Louis Grech have been speaking about, is nothing but an illusion according to the parliamentary secretary, as that lost revenue would have to be recouped possibly from the same registration tax.

“They are creating a crusade out of nothing, because it is a matter of shifting the way tax on vehicles is paid. While the government agrees with the removal of VAT on vehicle registration, this involves a huge reform process, which would have to be carried out over a period of about three years. The tax would probably be based on the polluter pays principle, so it would be emission based rather than registration based,” said Mr Fenech.

Mr Fenech emphasised that when implementing a fiscal measure, it is a matter of reprioritising one’s costs, including the health bill and education bill among others. It is a matter of acting responsibly without increasing taxation, he said.

At this sensitive stage, with the country trying to reduce its fiscal deficit, with the plan to eventually eliminate it completely, Mr Fenech is being cautious, particularly since the EU and the international community are now overseeing Malta’s financial situation.

He said that Germany was forced to increase its VAT when it was spending more than it could afford, because it could not increase its deficit. Bearing this in mind, it is perfectly understandable why the government is being so cautious.

“We have to keep in mind that investors will only come to Malta if they can see that it is a financially stable, competitive environment.

“Last year, the country benefited from about Lm600 million / EUR1.4 billion in foreign direct investment. During the 22-month Labour government period between 1996 and 1998, the country’s deficit stood at Lm150 million / EUR349 million and the income from foreign direct investment was just Lm80 million / EUR186 million,” said Mr Fenech.

In the run-up to this year’s budget, the government embarked on a promotional campaign, urging people to put forward their suggestions based on the pre-budget document entitled “Families Growing Stronger”.

Mr Fenech expressed his satisfaction, as the feedback was excellent. He said that from the suggestions and comments received, as well as from the pre-budget public consultation meetings, it was evident that people’s priorities were children, pensions and education, while the issue related to abuse of the social benefits system was also brought up several times.

“We will continue investing heavily in the education sector, because our future naturally depends on our level of education. We want to have more people furthering their studies, particularly in areas related to ICT, financial services and the tourism industry.

“Moreover, we want to create an environment that will encourage people to start-up their own business. We will be creating more incentives to try doing it, since we depend on job creation in the private sector to continue making the emerging economy as sustainable as possible.”