It was yesterday announced that the government intends to continue the shift from direct to indirect taxation. The news broke as the Finance Ministry formally submitted to the European Commission an Economic Partnership Programme (EPP), together with a Report on Effective Action, which outline the Government’s plan to close 2013 with a general government deficit below 3%.
The report says that further to the revisions in the income tax regime in recent years, the 2013 Budget provided for the widening of the income tax bands for single and joint tax computations, and for parents supporting minors who are not gainfully employed. However, this will be implemented gradually in a manner that will limit the expansionary impact on public finances which will amount to 0.17 % of GDP in 2014.
The same report said that for the period 2013 to 2016, the gradual losses from the revision in the income tax regime affecting direct taxation will be offset by similar gradual revisions in indirect taxation planned in the context of the budgetary exercise for the upcoming year. Moreover, revisions to the VAT legislation are currently ongoing, the report says.
In a nutshell, the report is pointing towards a continued downward revision of income tax rates, but an increase in taxes on consumption, such as, for example – VAT.
VAT – is an anagram for Value Added Tax – the concept is simple, people pay tax on what they can afford, and from a consumer’s point of view, it is a fair tax. Taking into account that a person’s wage or salary will increase if income tax goes down, a person will have to pay relatively more tax if they purchase a €50,000 car and less if they purchase a €10,000 car. It is all relative. Of course, the government should make sure that VAT on essential items related to healthcare, education and staple goods remains stable.
In addition, this all has to be put into the context of Malta needing to reduce its deficit to below 3% of gross domestic product. At present, our deficit is over the benchmark set for sustainable growth within the European Union.
The benchmark was originally established in the 1990s as part of the Maastricht Criteria, but for years, it fell by the wayside and now, countries have plunged into a crisis as a result. Malta has always been fairly consistent, but both the government and the EU identified that there needed to be some changes to ensure that Malta’s economy goes back below the threshold. But it does not stop there. Going below the 3% threshold does not mean that Malta’s sovereign debt will go down. It will continue to climb, albeit at a lower rate. Malta’s debt is also above the EU’s threshold, but it has not come anywhere near the catastrophic levels that countries which needed bailouts have registered. In all truth, Malta must work out a way to register a surplus rather than a deficit. Then, and only then, can we begin to chip away at the debt that we have accrued over the years. In its report, the government says its main economic and fiscal measures proposed include: the diversification of energy sources and the restructuring of the energy corporation (Enemalta); the restructuring of Air Malta; the Pension reform process including the proposed introduction of the third pillar pensions; reforms underway in the health sector; further investment in education; as well as measures to reduce the poverty trap and therefore encourage people to get into employment rather than stay dependent on social benefits.
Other important measures included under the EPP are measures to increase competitiveness through diversification, through incentives and programmes aimed at SMEs and other businesses and through various other reforms, including the holistic Justice reform.