As far as budgets go, Tonio Fenech’s plan for 2010 has been drawn up under the ominous clouds of the global recession that will certainly make 2009 an ‘annus orribilis’ for business.
Business has had to deal with declining export orders, higher water and electricity bills, the threat of illegal competition that often flourishes in adverse conditions, and a slew of indirect taxes which it feels has done much to hurt profits and its potential to reinvest and generate employment.
The unforgiving economic climate would make it hard for any finance minister to get to grips with the current state of affairs. Having gone haywire on its deficit projection last year, the government has found itself having to concentrate on reining in government spending, without relying on fiscal measures to reap in more revenue. It predicts bringing down the deficit below the Maastricht threshold by 2012.
The government’s fiscal conservatism is welcome on various aspects: it does not burden the middle-class consumer and leaves the income tax bands untouched, and as a kicker removes a ridiculous government levy on credit cards; the government says it will try to keep ministerial spending at 2009 levels; it will reduce public sector employment that would otherwise cost €10 million in salaries; and strengthen its efforts against tax evasion, and means-test social benefits.
If the government is really going to show its mettle by taking these ambitious targets to their logical conclusion, it is laying down the foundation for a more streamlined public sector. Does it go far enough? These measures were necessary years ago, when Malta was facing a crisis of excessive spending way back before it embarked on its journey into the eurozone. Today, millions of euros are poured into post-secondary and tertiary education grants, whose economic return (beyond the oft-repeated ‘human investment’) is as yet unquantified. Politicised hot potatoes such as stipends still cost the nation millions, and yet the government appears to be unable to deal with spending that is not judicious.
The government tries its best when it comes to business in this year’s Budget – more millions for enterprise, to attract foreign investment, enhance Malta’s profile in the IT and digital industries, renewing tax credits on reinvested profits, more cash for research and innovation, more industrial parks, micro-credit for some 1,500 SMEs, tax credits for SMEs, a small enterprise charter, and an additional €5 million for the marketing effort in tourism. There is a shift in the way government looks at small business, a shift that will hopefully be marked by concrete action and not simply rhetoric.
But business is not yet out of the doldrums. Many will fail to understand why, amid the growing concern on price inflation, the government did not choose to go ahead with the reduction in VAT from 18% to 5% for restaurants in the hope of generating a boost in consumer spending. Its economic analysis makes a good case for its justification: would the reduction be fully passed on to the consumer?
Perhaps, exogenous factors make this reduction difficult to pass on to consumers. Water and electricity bills, soon to be hiked up to reflect the international price of oil in January 2010, will deal yet another blow to business; and the lack of pro-active action on the Cost of Living Adjustment shows little concern for major employers who have called on government to reform the COLA.
This is as good a time to take the bull by the horns and get the social partners inside the MCESD to tackle COLA. We need a tax-neutral, and sectoral-based cost of living adjustment that guarantees both industrial peace and competitiveness. We need to safeguard hundreds of jobs that could be imperiled by the COLA increase that is applied across the board, irrespective of high value industries whose employees do not require such salary adjustments, and who prefer to negotiate their salaries individually.
Perhaps, this is why Budget 2010 remains stuck with the political yoke that seems to burden all past budgets. The will to drive through reforms that can make long-term competitiveness and economic growth a tangible ambition, is hampered by populist concerns. Government must get back to the discussion table with the social partners if it wants to hammer out an economic direction for 2010.