It was no surprise to anyone when Finance Minister Tonio Fenech announced that there would be no cuts in Income Tax in the next budget. It goes hand in hand with his expectation to have €80M less in Government revenue than projected. With many businesses and industries fighting a rearguard battle against recession there has been less than usual business activity: less to tax.
Government will have to cut down on expenditure and wherever those cuts take place, it can be expected to have a negative effect on the economy no matter how positive it may be for public accounts.
Saving on salaries in the public sector is virtually impossible. At best Government can delay promotions or replacing staff on retirement, a penny-pinching exercise having any positive effect instantly outweighed by damage to morale in the public service and consequential damage through less efficient service to its clients.
The next austerity options lie in reduction of expenditure in contracted services. This too affects the service to clients and has possible consequences for employment in the private sector as well as a further reduction in revenue from enterprises serving government departments. The follow-on effect is more clearly felt by operators who are able to provide supplies or services to the public only because their government contracts cover the best part of their overheads.
Whether we like it or not the Government is a major economic factor in Malta. We may complain that we are top heavy, that private enterprise and labour carry a disproportionate public burden when compared to other countries, still, when it comes to reducing public economic activity we should be aware that this will have a similarly disproportionate effect on the economy in general.
Had the economy been booming, a shrinking Government may have been welcome news: the prospect of a lightened tax burden to stimulate the economy further; the hope of short term restructuring with long term beneficial effects. In the midst of a global recession, mean and lead public accounts are a depressing prospect.
Tonio Fenech has very little choice. His response to the crisis has been to concentrate on helping industries to weather the storm and retain their workforce. He has also been talking of job creation in connection with the next budget but we should take such statements with a pinch of salt. His latest has been an announcement of measures to encourage self employment which must have produced a smirk or two among self employed people who feel that their category (not all of them are high flying professionals) has been driven towards extinction in the last several years.
The heart of our economy is made up of mom n’ pop enterprises with a handful of employees if any. Most of them work harder and for longer hours than would be allowed by any union. Very little has been done to relieve them of the burden of dealing with Government bureaucracy. Now would be a very good time to have a look at this problem.
The extra costs of fees, licenses and penalties are a serious irritant but worst of all are delays and procedures designed for multinational corporations with professional staff dedicated to this unproductive activity. Small operators bear a disproportionate burden
If this is not they year in which the PM’s pre-electoral promise to reduce income tax will be kept it may be a good year for taking a deep hard look at all the unnecessary and unwelcome ballast slowing down these small, super-efficient survivors. It may cost government nothing at all to make their lives a little easier and the return on that effort may be very significant indeed in these lean times.
In negotiations with international giant STMicroelectronics, Minister Fenech noted that the Maltese economy benefits from the salaries paid to employees and that the company pays no taxes in Malta. It may be hard to tell but it seems probable that there are no Maltese with a significant shareholding in the company. The same holds true for many other employers who have been enticed to our shores specifically to provide employment.
Commitment to globalization may be a fine stance but when our history of industrialisation since independence turns out to be a sort of economic colonialism without the counterweight of home grown Maltese enterprise venturing abroad, it may be a good idea to give a leg up to small enterprises which remain our only hope of ever taking advantage of globalisation other than as employees or lenders to multinationals through our investments abroad.