To go back to basics, the reason we hold elections is so as to decide which team gets to govern us, that is gets to tax us, since democracy is based on the “no taxation without representation” axiom.
Elections are thus held not only to pass judgement on the past administration and its handling of our money, but also to decide which political party offers the best economic policy for the coming years.
Money and taxes have come to occupy, rightly, a very important place in the national pre-election debate and we had some rather surprising undertones and even more surprising proposals.
How did the PN government handle our money?
Last week we spoke at some length on macro-economic themes and outlined the Gonzi (and Fenech Adami) administrations’ achievements in cutting down the deficit and getting Malta to join the eurozone at the first opportunity.
That was a signal achievement which cannot be belittled when Alfred Sant, as he did on Xarabank, cast aspersions on the PN 2003 campaign slogan Finanzi fis-Sod, misinterpreting this as having meant that the country’s finances were OK in 2003, when the 2002 deficit stood at Lm105 million, instead of understanding the slogan as promising to put the country’s finances in order, which it certainly did by bringing the deficit down to 2006’s Lm54.7 million.
To get there, the government had to increase taxation all around. Even here, there is, once again, misinformation galore. Azzjoni Nazzjonali leader Josie Muscat has claimed on television that Maltese pay the highest taxes in Europe. That is certainly untrue. Alfred Sant was on the mark when he claimed, in various speeches over the past months, that while the level of Maltese taxation is still not on a European level, Malta has had the highest increase in taxation in recent years.
Check this //ec.europa.eu/taxation_customs/ resources/documents/taxation/gen_info/economic_analysis/tax_structures/Country_tables/MT.pdf
In 2005, this study says, the overall tax burden in Malta, including social security contributions, stood at 35.3 per cent of GDP, which is well below the EU-27 average of 37.4 per cent. But Malta has experienced a more than 29 per cent increase in taxation (eight per cent of GDP) between 1995 and 2005. All categories of revenue have witnessed an increase, but this was most notable in direct taxation: direct tax revenues grew by over 40 per cent while the increase in indirect taxes was 27 per cent.
Nor are taxes the only thing in which Malta is still cheaper than other EU member States. Petrol prices, even though it has to be imported by ship rather than by rail or road, are still lower: E1.090 for unleaded petrol per litre as against E1.44 in Belgium, E1.368 in Germany and E1.37 in Italy. As for diesel, in Malta it is E1.02 a litre, and it goes up to E1.151 in Belgium, E1.257 in Germany and E1.344 in Italy (www.aaroadwatch.ie/eupetrolprices/)
In other words, it is true that over the past years we have had to pay more and more taxes (indirect taxes from 12.6 per cent of GDP in 1995 to 16 per cent in 2005; direct taxes from 8.5 per cent in 1995 to 12.1 per cent in 2005) but we are still below the EU average.
What about wages? According to a Eurostat 2007 study by Pierre Regnard, Malta’s monthly minimum wage in 2007 was E585, or in PPP terms 805. This had grown from E542 in 2004. According to a 2008 study by the WSI Institute, which is part of the union-friendly Hans-Böckler Foundation, 20 of the 27 EU member States have statutory minimum wages. Twelve of these countries have increased the minimum wage since the beginning of 2008. But in Malta, the report added, hourly minimum wages grew by two per cent, which is just about the rate of inflation for that year, or even less.
Precisely, inflation. If there is something which sure as anything undermines the standard of living and whatever has been achieved by a country’s workforce, that is inflation. It is a great shame that Thursday’s newspapers practically hid the most alarming news of the week, that the rate of inflation was up to 3.54 per cent in January, the first month in euro zone and that of all political figures, only Tony Zarb, the GWU secretary general, seemed to notice. That is way beyond the famed Maastricht criteria.
And finally growth. The Central Bank’s Quarterly Review (see page 1) issued last week said that Malta registered a 4.1 per cent GDP growth in the third quarter of 2007 bringing the expansion in real GDP in the first nine months of the year to 3.8 per cent. Interestingly, in view of our comments later on, the Quarterly Review added that as in recent quarters, the impetus for growth came primarily from higher private consumption, up by 6.9 per cent.
The unemployment rate declined to 6.2 per cent, the lowest since Q1 2001 while the Labour Force Survey showed an increase of 2.1 per cent in total employment though most of that seems to come from a 13.8 per cent rise in part-timers.
The proposals
So that’s the situation. Our situation, with its positives and its negatives. How are the parties reading the present situation and what are they proposing for the future?
The Nationalist Party
The Nationalist Party has proposed more income tax cuts. It will push even higher the Pay no Income Tax band, put an even higher level from which one starts paying 15 per cent tax, and, above that, only those who receive up to Lm26,000 will pay 25 per cent tax; 35 per cent tax will only be paid on that part of the income that exceeds Lm26,000.
One can actually prove that Malta’s dull growth rates started to improve when, two Budgets ago, the Gonzi government announced its first tax cut. This is right in line with the PN’s attitude to taxes all along, right from the year (1987) when George Bonello DuPuis reversed the draconian Mintoffian 65 per cent top income tax rate (65 per cent to the government and 35 per cent of what’s left to you) to 35 per cent to the government and 65 per cent for you that created the massive stimulus to the economy that Dom Mintoff had stifled, and Malta boomed.
It was also Bonello DuPuis who drilled huge holes into Mintoff’s Death and Donation Act 1974 and it was John Dalli who abolished it. It was also John Dalli who, in 1993, introduced the 15 per cent Final Withholding Tax on bank and bond interest we today take so for granted.
Government revenue, as a result, did not succumb: on the contrary it shot up. In fact, if there is a criticism one can make at this point is why did this government leave the tax cuts to be mere promises on an election manifesto rather than put them in, as we had insisted at the time, in this year’s Budget Speech?
The Labour Party
The Labour Party has made three main proposals in this area:
To remove Income Tax from overtime
To cut the electricity surcharge by half
To reintroduce the weekend feasts that had been taken away.
Mainly, Labour has complained that the growth rate is still low, (disregarding its late improvement), that the economy is stagnant, and that people and families are succumbing to the increased burden of taxation.
It claims it will ratchet up growth to between four and six per cent but for the most part seems to think this could come about with development projects such as it had done at Bugibba, through less cost overruns and delays, and focusing on more pro-manufacturing.
When it brought out these three key proposals, it claimed that this would put money back into people’s pockets and would thus stimulate consumption and growth. The problem with such proposals, Labour’s and PN’s, is that roughly 80 per cent of what people get in increased wages will exit straight out of Malta as more imports flood in. Having said that, as we have already pointed out, a fair share of our growth is stimulated by increased private consumption. Like a hot drink when you have a cold, it does not cure the cold, but at least it makes you feel better.
Removing income tax from overtime payment may be somewhat difficult to implement but it is already in force in France and is a main plank of Silvio Berlusconi’s electoral appeal.
It can be argued these two countries have needs that are completely different to ours. France has the 35-hour week and thus needs people to work overtime. Italy has a black economy, which is bigger than the economy that is declared for tax purposes. It thus also needs to bring as much of the black economy into the light as possible.
Do we have that kind of problem? No. Our workers do not need to be enticed to work overtime and most workers (at least going by evidence anyone can see around him) simply flit to an unregistered part-time job for more money in their pockets rather than going into the whole palaver of paying tax on their income but not on their overtime.
And, more importantly, what our economy really needs (and many times Dr Sant himself makes this argument though he then fails to follow it through) is more women working and more males continuing to work rather than take the early retirement route. By removing income tax from overtime, Labour is enticing employers to continue employing the existing workforce with the overtime sweetener rather than taking on more workers, especially women.
One asks here why did not Labour go for straight income tax cuts just like PN has done? Or why did it not think of something to entice women back to work as PN has now done, assuming this too will work.
As for the surcharge commitment, apart from what we report today on the front page, it is hard to see how any self-respecting voter could go along with this very evident vote-catcher.
To begin with, this is all due to a mistake by the present government for creating something it called the surcharge, thus making it seem like some add-on which could be removed at will, instead of simply transposing the imported fuel price to the electricity bill. (Our information is that this was due to a fluke in Enemalta’s billing system, which goes to show this monster which undermined Alfred Sant in 1998 is still alive and kicking.)
Secondly, this is the most anti-social commitment by Labour in living memory. The man with a pool will benefit more from this proposal than a family on social assistance.
Thirdly, this is environmentally very damaging since it actually encourages waste. Where are all the environmentalists or are they adept only at hollering against the government?
What, exactly, is half? Half of what? When will such a commitment be capped, when oil is at, say, $150 a barrel? What does the Labour Party estimate will it cost it at $100 a barrel?
The third proposal, to reintroduce feasts on weekends, costs a Labour government nothing, for it will come out of the employers’ pockets. Labour has argued, and is right, that Malta has fallen back on the international competitiveness stakes. This was introduced as a small measure to increase competitiveness. It does not seem to have worked, for we have grown less competitive. But that’s no reason to remove it. Rather, there are all reasons to supplement it with further competitive-inducing measures.
Conclusion
To recapitulate. Malta has finally latched on to the road to higher growth that seems to have been kick-started by cuts in income tax. Even so, a growth that is fuelled by domestic consumption is still fragile: we are still living beyond our means. We need a slimmer government (and no party is proposing cuts) and we need less red tape, less time-wasting bureaucracy.
Labour may have felt it would be indecent were it to suggest income tax cuts, for income tax cuts suggest people who pay taxes. There are other means to help the poor, the people at risk of poverty. By proposing to halve the surcharge bill, it is telling people they can waste as much as they want: there will always be nanny-government to protect them from their own wastefulness.
The basic argument which undermines all that Labour is saying is quite simple: why insist on change of policies when the policies in action today have brought growth, a certain affluence and a rather comfortable standard of living?
As we said last week, we are, so far, not saying this group must be on top, Rather than that, what really matters is continuity in policies. Whoever is at the top.