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George M. Mangion | Wednesday, 06 January 2010

A sunshine year

George M. Mangion

Many are still hopeful that the worst effect of the 2007/9 recession is slowly residing and there will be an economic reprieve this year. This shows from the encouraging rally in shares over the New Year and the fact that optimism is linked to fluctuations in dollar value and rising oil prices. In fact checking with the indexes one reads that oil for February delivery rose US $2.15, or 3 per cent, to close at US $81.51 a barrel, the highest settlement since October 2008. This reaffirms a modest recovery. Again more positive news is linked with the news that the Standard and Poor 500 is up 23.5 per cent from its lower levels reached last year. Furthermore US banks are starting to repay TARP rescue funds loaned to them by the US Treasury while many economists are even predicting growth for the US economy and job market in 2010. In America analysts think that growth will be strong in the first half of the year but will taper off a bit in the second half. Europe will also witness a pivotal election in Britain this year. To win the election, the Conservatives need to gain 117 seats certainly not a mean feat and analysts say it will be their best performance for 80 years. If as has happened in Malta in 2008 there will be a razor sharp difference in polls some are even predicting a hung parliament which will see the Liberal Democrats become the King makers whereby deciding where to tip the balance. Hot on the heels of pre-election campaign Mr Cameron the Tory leader was busy launching his election posters across the country. They criticised the Brown strategy of halving the deficit in four years by inflicting severe cuts in health, social services and partly on education. Never mind the GBP 19bn worth of new taxes. Typically Cameron eye catching poster proclaimed ….
“We can’t go on like this. I’ll cut the deficit, not the National Health Service.”
Still the bitter pill cannot be swallowed by the patient so easily given that Britain’s deficit of more than 12 per cent of GDP is the biggest of any major economy. It is no secret that its public finances (similar to Ireland) have been ravaged by the crisis in the financial sector and the crash in the housing boom.
Back to Malta we read in the Times of Malta a prediction by the Employers Association‘s president that the country will emerge from the recession by the end of this year. No doubt there is fear that an increased cost of living may push employers to lay off workers unless there is more investment in both tourism and particularly manufacturing sectors. There is some worry that competitiveness will also suffer due to increases in energy tariffs and the cost of living increases awarded in the COLA scheme. But otherwise steady as she goes. With hindsight one can safely contemplate that 2009 was an eventful year since we saw the massive Enemalta restructuring with the resultant realization that we must roll our sleeves to meet the challenges of a modern system of electricity generation away from the aging plant that we are currently operating at such a heavy cost. It is true that unemployment has edged up alarmingly and this will be a thorn in the new social minister for this year. (That is whoever replaces John Dalli). 2010 starts with the aftermath on the shake up of the Dubai bond market. This was a surprise to many investors and one also hopes that remedial funding by Abu Dhabi will restore confidence in the Gulf Emirates to bolster this important leisure and property sector which has attracted the admiration of many (now with the launching of the World tallest building).
For us in Malta the accomplishment of Dubai is reflected in the massive Smart City project which was announced two years ago and was lauded as the miracle cure in creating of up- market ICT jobs for over 5,000 workers. Smart City was part of Tecom Investments a company owned by the Dubai ruler.
I need not ponder too much about this pre-election promise that gave the PN a leg up and saw a large track of land allocated to the gulf Arabs in return for the investment of $300 million. All this was part of a vision by the PN to grow the island’s potential particularly in ICT, Financial services, high –value added manufacturing and biotechnology. I recall attending a PN event days before the March 2008 election where in a packed hall Dr Gonzi was addressing financial services practitioners at a business breakfast. He sounded bullish on the Malta‘s growth and did not hesitate to predict that there will be a shortage of qualified workers in the financial services sector. This is particularly true in the accountancy and auditing sector where accountants’ vacancies carry a premium.
To elaborate on this subject of non-domiciled settlers, let us visit the scene in Britain which in the past has encouraged many rich foreign businesspeople to live in the country enjoying favourable tax schemes. This clever scheme has lured many Greek shipping tycoons, Saudi princes and wealth American bankers to take advantage of the laws. Paradoxically, last year the U.K Chancellor has enacted new rules aims to tighten up on taxing non-domiciled persons which may reverse the its popularity. Naturally there has been widespread criticism on such a move to squeeze new levies on non –residents. In a nutshell the new rules do now tax non-UK domiciled individuals who had been resident in Britain for more than seven of the past 10 tax years at a flat annual tax of GBP 30,000. More people could choose to leave the Britain, reducing the tax yield as has happened in the early seventies in Malta when the Socialist government started charging a higher levy to permanent residents. But can you blame the UK Exchequer in a time of record national UK debt.
The battle cry was to crack down on offshore trusts owned by such people. Normally immune from capital gains tax, offshore trusts are being inspected to ensure that wealthy individuals do not avoid paying any tax at all. It stands to reason that Malta needs to polish its act to gain some of the UK settlers who are feeling the heat.
This is more achievable in the wake of the uncertainty felt in U.K following the practice now in force to tax non domiciled high net worth individuals. This is not to mention a top 50 per cent tax rate on employees who exceed the threshold in earnings and on bonuses paid to bankers. Ideally we can ride on the success of countries such as Switzerland and Dublin to attract high flyers. Yes 2010,can be a testing year for Malta and I am sure that given industrial stability and armed with a cohesive drive to upgrade our incentive legislation we can be among the earliest ones to harvest the grass shoots in the economic garden.

The writer is a partner in PKF an audit and business advisory firm gmm@pkfmalta.com

 

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06 January 2010
ISSUE NO. 615

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