The Malta Independent 7 August 2020, Friday

Bright ideas needed to help business recover

George M Mangion Wednesday, 15 July 2020, 09:22 Last update: about 22 days ago

Reading through the weekend press, one notes how critics wax lyrical on the drop in business both retail and otherwise not withstanding a lot of hype by government saying it saved 90,000 jobs.

Statistics are cheap nowadays; for example, one wonders how 90,000 jobs were saved when around €20m a month was paid in job supplements. Each job supplement reaches €800 (10% FSS) and therefore this equates to a smaller number of jobs saved each month. A new gimmick is the issue, this week, of the €100 cash vouchers with an expiry date of three months that are distributed free to 440,000 residents.

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This was a brainchild of Malta Enterprise, partly to compensate that it shall scale down on the wage supplements for the next three months. The populist idea to give plebs "bread and circuses" carries a short fuse. Some of the cash may temporarily quench the thirst of low domestic demand while other vouchers may be frittered away on non-essentials. Shops may fall into the temptation to raise their prices, accelerating inflation.

The alternative solution would have been a drop in VAT, so as to reduce cost of living. Both the German and the UK governments recently took the plunge and reduced VAT on hospitality and food services to 5%. Obviously, reducing VAT without taking adequate measures to ensure shop and food prices are reduced is penny wise, pound foolish. Studies in Ireland have discovered that when VAT was reduced; most of the benefits were not passed to consumers. In Hungary, last year they tightened on VAT evasion by making each and every cash register linked electronically to a central system. This will facilitate remote monitoring of daily transactions and with careful analysis throw out the tax evaders.

In Malta, tax evasion on VAT (including hotels and restaurants) is high so if better supervision is introduced the drop in revenue following a rate cut can be partially recouped by better compliance. The following schedule shows how Malta's COVID rate of 18% on food services is the highest in Europe.

The Chamber of SMEs has been very active, pleading with government to introduce a recovery plan. There has been a number of suggestions such as subsidised rents but a one-time offer of €2,500 was considered too late and too little. Another suggestion was a revision of income tax brackets so small traders reporting income not exceeding €100,000 in profits are taxed up to 20% (the current rate is 35%). This was rejected.

The conversion of the existing MicroInvest tax credits into cash grants to inject liquidity into businesses was a step in the right direction. This long introduction needs to be read in the light of Malta running an economy, which prior to the onset of the pandemic, was the envy of all EU states.

The IMF's latest report on Malta was mildly optimistic saying that this year the economy will shrink by 2.8% before rebounding into a strong 7% growth next year. Unemployment is also expected to rise to 5% this year, the IMF said, before falling slightly to 4.4% in 2021. In reality, the actual number of jobless is closer to 20,000 and will probably increase after September, when the job supplement scheme is stopped. Upon reflection, we seem to have forgotten the golden pre-COVID days when living was easy and workers were hard to find. Reminiscent of such days, one can attribute the bonanza to a multi-million euro property market that flourished under Joseph Muscat's baton.

The GDP growth doubled in seven years as the island had never seen such grandiose building projects and full employment (major building sites were recruiting Turkish workers). No feathers were ruffled at Miles End, when public land worth millions, was granted to selected hoteliers at fire sale prices to encourage promotion of upmarket tourism. Such affluence came with a wanton greed for erection of soulless concrete structures that sent the average rents sky high.

During the so-styled L-Aqwa Zmien, money was no problem and the economy flourished resulting in an acute shortage of workers which was partly solved by engaging third country migrants. In fact, thanks to Muscat's populist administration, the economy turned the corner unleashing a feel-good factor that saw the nation throwing caution to the wind. Vices were camouflaged as virtues and state propaganda hailed the economic breakthroughs of VGH's billion-dollar hospital deal, the Zonqor Point plan to host an American University, the India mega ITC project signed with Enemalta of €85m, a wind farm in Montenegro and the wonderful conversion of electricity generation to LNG. This was achieved by partnering with Socar - the opaque financial arm of the Azeri. Accolades were showered on the Muscat administration which turned a chronic deficit budget into a surplus.

Party apologists and other cronies, with snouts deep in the trough, previously told us to celebrate our fortune while migrants clean our streets and foreigners serve us in hotels and restaurants. An artificial sense of profligate living made us believe the party will never stop, but unfortunately it did with the detection last December of a lethal virus in Hubei, China. So, one may ask what is the fly in the ointment of the proverbial isle of milk and honey? Do we deserve such misfortune?

Perhaps history repeats itself and human nature tends to score its own auto goals. The Bible story of the seven years of bounty to be followed by another seven years of famine rings familiar. Notice, how during the three months of lockdown, all schools, university, hotels, restaurants, gyms, shops, cinemas, bars and places of worship were shut as if the Martians had landed and scared everyone to stay indoors. International business, so crucial to an open economy mainly based on services, is temporary on the rocks.

In conclusion, apart from internal problems mentioned above, one is conscious of the Damocles sword over our heads as the constituted bodies and banks fear that a negative conclusion of the Moneyval inspection will rank the island into a grey list.

The writer is a partner in PKF Malta - an audit and business advisory firm.


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