The Malta Independent 24 February 2020, Monday

The end of summer showers pennies from heaven

George M Mangion Tuesday, 4 September 2018, 11:41 Last update: about 2 years ago

Is it the low humidity or lack of St Maria showers that remind us how enjoyable summer is? We have beaches packed with smiling tourists (lured by low-cost airlines and hotels offering cheerful all-inclusive eat/drink facilities), carefree children running on sandy beaches dottedwith colourful umbrellas for hire,indulging indelicious ice cream bought from kiosks that look like intimidating mahogany chests.

Regrettably, not much the same can be said for neighbouring Mediterranean countries which in the past suffered from a worldwide recession with corresponding low disposable incomes. Consider our neighbour Italy. Its disposable income for the average household has unfortunately shrunk in the past four years.

Equally distressing is Greece, although it was successfully released from its bailout yoke recently. Still over the past six years, Greek households lost 24 percent of their disposable income (not to mention a dropin pensions), while not forgetting Cyprus its cousin - an island whichlost 22 percent.

Can we say that Europe has been through its baptism of fire while countries like Germany, Finland and The Netherlands continued to prosper and build a rich hoard of country surplus? Yes, this surplus was the balancing figure that kept a fledging euro afloat as it sailed through troubledwaters. Naturally, the envy of most economists focuses on the stellar growth pattern of the three heavyweights redolent with precise engineering, unbridled production of luxury goods and technological superiority.

Now, feeling the benefits of a recovery, perhaps it is proper that workers stand up and claim their rights to partake of the surplus built upby the northern members of the EU but gladly also the Mediterranean countries. No longer do economists discuss Europe's prospects using the grim vernacular used to describe countries such as Japan.It looks like the recovery will see healthy improvements in GDP growth encompassing countries such as Malta,Estonia, Ireland, Czech Republic, Hungary and Poland.

The nightmare is over. But can we ignore memories of the property bubble starting in 2006which gripped a number of Mediterranean countries?This was mainly due to greedy speculators aided by weak urban planning. During the bad dream, Ireland, Spain and Portugal suffered a calamitous bust that left banks reeling.

Perhaps with hindsight one may opt to blame politicians who preferred taking half-measures ostensibly aimed to keep the ship of state afloat but in the endleft it in the doldrums. Not so inMalta, wheresmart politicians took the bull by the horns during the recession and stabilised the ship of state in 2007/8,resisting popularcries from Brussels to introduce austerity measures. This year, armed with a government surplus of 3.9 per cent,gavethe Finance Minister impetus to loosen his tight grip on the public purse.

All the more so, when one recalls that Fitchexpects 5.6 per cent real GDP growth for the coming year. The splendid news is that government has just announced an annual tax refund payable to most taxpayers as a way to mitigate tax burden.

Finance Minister Edward Scicluna told a press conference that all those who earned up to €60,000, including those who did not pay income tax because of their low income, would be refunded a sum which averages €200 up to €340 per taxpayer over five years. It will dent the surplus by €11.4 million in total and works out at a minimum of €40 to a maximum of €68 per person per annum. This is equivalent to treating the family to a pizza washed down with a glass of wine, dessert and coffee.

It is a populist gesture to please the plebeians, since it effectively reduces personal taxation, generates additional cash flow for all registered workers, and partly compensatesfor rising cost of items such as energy, fuel, milk and sadly the ubiquitous pastizz. Obviously, part of the refund will be eaten up by 18 per centVAT once the happy family hits the restaurant to celebrate.

Pragmatists say this one-time tax refund may be further improved if tax on consumption is reduced. A recent PKF study illustrated the possible consequences on elasticity of demand should the government decide to reduce the VAT rate on food from 18 per cent to seven per centand beverages to 13 per cent over a two-year experimental period as was successfully done in Greece.

Indeed, competitor countries such asSpain and Italy both charge 10 per cent on restaurants and on the provision of meals and beverages to be consumed immediately, even if they are made after the recipient's order, while The Netherlands charges six per cent on restaurants (excluding alcoholic beverages), take-away food; bars, cafes and night clubs. Poland charges eight per cent on food and 23 per cent on all drinks including coffees. We are more expensive than our competitors in Europe are. The sector forming part of the Catering Establishment association consists of around 2,000 entities of varying size and employs thousands of workers.

In the EU,Luxembourg has the lowest VAT rate on restaurants of three per cent on food and 17 per cent on alcoholic beverages. Needless to say, there is discrimination in the application of VAT. This means diners are charged a full rate of 18 per centwhileothers at a lower seven per cent on hotel accommodation and on meals served in hotels in case of combined all-inclusive food and drink packages.

It is no secret that most restaurant owners are facing problems which include increasing rents, a severe lack of entry-level staff and competition from foreigners setting up fast food outlets. These combined factors push owners to either abuse the system or trade on low margins and the inevitable happens - quality suffers. Such a scenario creates a two-way structure -those who abide by the fiscal rules and suffer a lower return on capital (due to high overheads) and the rest who in varying degree abuse the system by indulging in tax evasion.

This includes not fully declaring salaries, understating sales or employing non-EU workers at low wages. Naturally, the government is aware that abuse exists;however, internationalstudies show that following a reduction inVAT rates on catering, compliance will improve and a positive multiplier effect supersedes reduced tax revenue.

At a later stage, after consultations with the social partners, retailers and restaurant owners will discuss a transition period to link cash registers electronically to a central server using modern blockchain architecture. In conclusion, it is time for workers to enjoy the rest of summer's working hours and be grateful for pennies from heaven. When heading for relaxation never underestimate the splendourof our sandy beaches guarded by a legion of umbrellas and deckchairs.

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Mr Mangion is a senior partner in PKF, an audit and business advisory firm







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