Finance Minister Clyde Caruana told The Malta Independent on Sunday that government has "no intention at all" to reduce any tax rates, but reiterated government’s pledge for no tax rate increases.

The minister sat down for an interview with The Malta Independent on Sunday ahead of the budget presentation on 24 October.

The Chamber of SMEs made a number of tax proposals, which include calling for a VAT reduction to help businesses. It argued that at the moment, government is receiving more income from VAT due to the increased prices of products. The Chamber said that if government lowers VAT, it will not necessarily reduce its projected income. 

Asked about this, the minister said that VAT will not be lowered. "I have no intention at all to reduce any tax rate. Our pledge is that we will not introduce any new (taxes) or increase rates. But at the same time, government has to have the necessary resources in order to finance these extraordinary expenditures."

"Money has to come from somewhere. What we're doing is already way beyond what other countries are doing," he said, in reference to the support measures in place. "I have to make sure that government's revenue is safeguarded. We're able to do all this because government remains fiscally responsible."

The minister was also asked about the Cost-of-Living Adjustment mechanism. The amount expected per week next year has been touted to be between €8 and €10 a week. But with the budget just weeks away, the minister told this newsroom that the amount will be closer to €10 a week. "The numbers are still being worked out, but from the information that I have, most likely it will be very close to €10."

However, he doesn't believe that businesses will close down because of this.

As for whether government will implement any measures to support businesses due to this, he said that government is already doing quite a bit in terms of the energy support measures. "We are spending €600m (on subsidies), so I would say that is quite a good deal of money." 

While government has been straightforward in saying that the COLA mechanism will not be touched this year, he was asked whether it is open for discussions for future years.

"If the employers and the unions manage to bargain an agreement, why not? Government is open to considering any kind of proposal that will have the consent of the two sides."

Government announced that next year, €608m will be allocated for energy and food subsidies. 

He said that from earlier this year and throughout the summer he studied all government expenditure "to ensure we get our priorities right".

The way things are evolving in terms of the Russian-Ukrainian war, the finance minister said, "it is becoming more obvious that it will not be resolved tomorrow. It's highly likely that it will keep going on for the next months, if not years as well. The way things are evolving in terms of the oil cap, and the political repercussions of all of that, it's highly likely that it will increase energy prices".

He said that they had to plan to ensure that Malta has the necessary resources for next year, and if needs be for the years to come. Usually in terms of numbers, he said, forecasts are made for the upcoming year and the one after. "This time round, I've planned until at least 2027."

If energy prices over the medium-term remain quite elevated, "then we have to ensure that what we're doing remains sustainable not only in terms of energy, due to the amount of resources we require,” he said, "but also to ensure that it is fiscally sustainable for the government itself".

As such, he said there was a “reprioritisation exercise” in order to “make sure that there is a line vote which accommodates all that amount of money".

As for capital expenditure for next year, the minister said that it will be higher than this year. "But, a significant amount of the funds, I would say around a third, will come from EU funds.”

“This year, the amount of money coming from EU funds will be around 20%. Essentially, what we are doing is making more and better use of EU funds for next year, which will give us some breathing space in terms of how we reprioritise our expenditure."

In that way, he said, part of the funds can be allocated to the subsidies.

Turning to those who downplay the effects of the subsidies, he said that if government was absent with respect to the subsidies, there would have been a major impact on the GDP and there would have been a permanent shock moving forward.

What is happening right now, with respect to energy prices in terms of the world economies, he said, "they cannot sustain such a high price forever”. 

He predicts that prices will remain high this year, "perhaps a couple of months next year, till mid-next year or so, but then eventually something will have to give. So it pays to keep subsidising energy prices. And that will enable us to keep the supply structure of our economy," he said. "The moment we stop doing what we're doing, the economy will be hit hard.”

He clarified that the €600m being allocated for subsidies includes a buffer of around 12%, “so the government might spend less than that”.

Asked whether some sectors will receive less funding next year than this year, he said that there will be a few entities whose expenditure will remain the same, or be slightly less. 

"Over the years government expenditure has increased substantially in different areas, and by significant amounts (...) I'm quite sure that all entities can deliver the same output, if not more, with less money. This fixation, that we always have to throw money at things in order to get some form of output... at the end of the day, it's not how efficiency should be delivered. I'm not going to mention specific cases for now, but I am aware of a good number of entities that looked into their expenditure and found enough fat from where they can cut."

  

University of Malta funding

There was some controversy regarding the reduction in the University of Malta funding, reportedly by €1m. Government was criticised over this move. 

"I would say that it was blown out of proportion,” Caruana said on this issue.

 He said he is willing to sit down with anyone from the University and conduct an audit exercise to see whether there is any unnecessary expenditure or inefficiency. “And I'm sure that we can allocate the resources to research and more, and the inefficiency that can arise from other things, and which perhaps are resulting in waste, can amount to more than a million."

"I'm sure about what I'm saying, I've spent 12 years lecturing at University." 

He said that, if not mistaken, in the past the University was offered the amount of €6m from the NDSF (National Development and Social Fund) to be spent on research “and that amount was never claimed. So much so for the €1m cut".

 

Keeping public sector employment stable

He was also asked about public sector employment. Employer bodies have repeatedly said that public sector employment has been on the rise for almost a decade, expressing concern over government taking employees from the private sector.

Minister Caruana said: "The way things are evolving in terms of government's recurrent expenditure and the constraints that are arising because of these new commitments, all of them exercise their pressure on government expenditure and how the money is spent."

“I do anticipate that in the coming months and years government will have to reprioritise, even in this area."

Asked whether he envisages a shrinking of public sector employment, he said: "Well perhaps, if it doesn't shrink, at least it would remain stable."

A proposal made by one of the social partners during the budget’s consultation period was for the secondment of public employees to the private sector. The minister shot this idea down. "It doesn't make sense," he said. "It can't work."

  

Metro and Gozo tunnel

He was asked about two large projects in particular, the metro proposal and the Malta-Gozo tunnel, whether they have been scrapped, pushed back or to provide details as to what will happen to them.

"Well, I'll just reply with a smile to your question.”

Asked to elaborate, he said: "It's quite obvious no? It's about priorities."

Asked how big an issue tax dodging is, he said: "It is (big). I've never shied away from this argument. I was criticised. It didn't go down well; I would say with quite a good number of people who perhaps paying taxes wasn't part of their culture in the past. I took the necessary steps over the past months."

He mentioned a budget measure announced last year, where interest rates on dues had to rise. "We had a situation where it was more worth it not paying taxes rather than getting an overdraft from a bank. Because the bank overdraft – the cost of it in terms of interest – would have been of 5%, 6%. Whereas if you don't pay your taxes, you would have to pay just 3.6%. So now that has gone up to 7.2%."  In addition, he said, the way the department is working, in terms of how tax arrangements are carried out, is leaving desired results. "There's a lot of work that needs to be done. The department is organising itself and I'm quite sure that in the coming months and years, there will be a shift in terms of this kind of culture."