According to the latest 2016 data published, Malta registered a decrease in the risk of poverty and social exclusion (AROPE) rate from 22.4 per cent to 20.1 per cent. Goal achieved? Maybe not. It is interesting and necessary to note that when one analyses this value by age group or household type one finds evidence that this improvement has not benefited everybody. Economists have a habit of questioning whether in times of boom the trickle-down mechanism actually works. How efficient is the distribution of wealth? Is it reaching down through the capillaries of the population strata including low wage earners and pensioners? For instance, for pensioners in the age group of 65 and over, the AROPE rate increased from 23.7 per cent in 2015 to 26.1 per cent in 2016. By 2030, the number of people in this age group will exceed that of young people aged 15 to 24, so what follows then? Moreover, Mr Sammut, managing director of Kitchen Concepts (a major chain of restaurants) in an article published in The Independent on Sunday last July, said that the restaurant sector is facing a big challenge caused by high rents, excessive competition, difficulty in finding qualified personnel and low profit margins. For these reasons and probably much more, tax evasion by some restaurant operators to make ends meet although not condoned seems that they have no choice.

PKF Malta in pursuance of its corporate social responsibility decided to conduct two studies that will hopefully provide a scientific basis for stakeholders to be able to examine even deeper the solution deemed necessary to render the restaurant sector more feasible and, more importantly, to demystify the onset of poverty in society. The studies concentrated on the effectiveness of the pension system and on the VAT rate charged in the food and beverage sector. To ascertain if there is a link between poverty and the current pension system, PKF conducted a questionnaire-based investigation based on a sample of respondents that we met on the streets and visiting three government-owned homes for the elderly. The main purpose for this study was to shed light on the controversial aspects of poverty, identifying the undulating trends of personal expenditure and to investigate that part of the population, aged 65 and over, which is usually identified as more at risk of suffering from social exclusion or low income. In The Dictionary of Sociology by Scott and Marshall, poverty is defined as "a state where an individual or a group of people lack the sufficient resources to maintain a healthy lifestyle or even lack the necessary means to achieve a standard of living which can be considered as being suitable in a particular society". Is this acceptable in the booming economy of 2017?

The first noteworthy observation from the results of the survey is that almost 70 per cent of households rely exclusively on a single pension. Investigating respondents' ability to save money while having only a single source of pension income resulted in more than half of all respondents unable to save for any unexpected illness or a future holiday. Pensioners in nursing homes generally complained about low income, that they do not have any other source of income or do not receive any contributions from family or friends. Saving was identified as being one of the most important means to avoid running out of finances when unforeseen events occur, indicative of a traditional aspect of Maltese culture - 'save for a rainy day'.

When evaluating pensioners' comments on the pension system these were positive overall, but in some cases they cannot afford to go to any events, concerts or museums. For this reason, pensioners feel detached from society. Social participation is an important factor especially during old age and should be constantly supported by the family and the community, especially those who have low self-esteem.

Another observation is the plague of gambling to try to win money. The respondents were asked to indicate the medium monthly amount gambled, revealing that about 30 per cent of the sample gambled more than €100 in a month and do so more than once a week.

If they couldn't afford to go to cultural events, museums or restaurants, maybe the problem is not only in the pension system. It might be a problem of a gambling addiction, or the basic cost of medicines and incidence of unsupported illness that creeps up.   

 

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When looking into the alleged financial problems faced by the restaurant sector, the study encountered difficulty when requesting data from the MHRA or even individual members to disclose trading patterns. The MHRA welcomed the initiative to throw light on the restaurant sector but demanded a fee in advance on condition to endorse it. A request for support from a leading local bank which officially sponsors MHRA's hotel studies went unanswered. Notwithstanding, PKF went ahead with its study to try and expose the true causes concerning the alleged non-declaration of VAT and low wages paid to serving staff particularly those from non-EU countries. In accordance with European law, every Member State can have two or more different VAT rates with the only constraint being that the standard VAT rate has to be at least 15 per cent and the reduced rate at least five per cent. The highest rates are in Croatia, Denmark and Norway at 25per cent; the lowest is Luxembourg with three per cent. The VAT rate in Malta is 18 per cent like it is in Hungary. During its difficult financial period from 2011 onwards, Greece experimented to attract new business by reducing VAT from 23 per cent to 13 per cent, which proved useful and VAT tax evasion declined.

According to macroeconomics mainstream, lowering the VAT rate would, in general, generate a number of outcomes that can help the economy to grow albeit to the detriment of public finance. But what happens if the VAT reduction is not transferred to consumers through a reduction in prices? What if the sector margins are very narrow and operators decide to use the reduction in VAT to augment their profits? This option looks very realistic. Moreover, there is no constraint of demand increasing through reducing prices, because competition in the restaurant sector is already in a sort of market equilibrium. Some diners may complain about the quality which is dwindling. There is consensus between operators to use the decrease in tax costs to improve the quality or reinvest to refurbish the restaurant.

So if the government agrees to reduce the rate to say 13 per cent in the next budget, one can expect an improvement in the sector's margins leading to an improved image of the sector and of Malta's tourism in general. There is a counter argument which states that if the island with higher standards is able to attract richer tourists, who are looking for quality rather than low prices, this would generate an exemplary result in the GDP level. Another possibility not to be underestimated is the impact on the black market. It is a known fact that the black market exists everywhere and empirical studies show that lower taxes reduces its influence.

In conclusion, there is scope for more support to encourage consulting firms to carry out a deeper examination of the incidence of poverty and the alleged tax evasion. PKF Malta welcomes any support to undertake further studies.

 

Marianna De Franchis is an Economist at PKF Malta