Friday, 13 October 2000

Budget Anticipations

The Malta Independent

Budget Anticipations

Is this just a strange country or have the strategists of the political parties completely lost their balance`

In the run up to the presentation of the Public Budget for the year 2001, which would in normal circumstances take place within the next month or so, we are seeing both political parties adopting untypical positions.

The Opposition would normally be raising people`s expectations about what to expect from the budget especially once government spokesman keep stressing that the economy is registering substantial growth and all macro-economic targets are being met.` Raising people`s expectations would than leave a political dividend` when the actual budget measures are announced which cannot but take account of the still precarious position of public finances.

Instead the Opposition keeps conditioning people to expect further unpopular taxes from next budget as government has to continue turning the screw to fall within its medium term financial strategy and in order to finance the additional expenditure emanating from the maturing payments under the collective agreement for public employees. This is politically unwise` as actual measures, though hard, could be made to seem gentler by people who were positioned by the Opposition to expect something worse.

The Government on the other hand would normally be working to keep a lid on people`s expectations in this mid-term budget.` This is normally the time for unpopular measures to be taken reserving the goodies for the last couple of budgets before the` election.

Yet the Finance Minister seems to have made it his mission to inform one and all that the economy is moving just fine, that the public deficit` is coming down faster than anticipated and that his magic formula is generating economic growth in spite of the fact that at the micro level domestic oriented businesses are financially squeezed between` reducing demand and jammed cash-flow.` On the other hand export-oriented business is probably performing well but this is more the result of buoyant economic growth in trading partner countries rather than the magic wand which economic managers tend to take credit for.

Against this background the budget minister, as if in the throes of an election campaign, has assured us that income tax rates and` petrol prices will not be increased.

This was made to sound like manna from heaven for which we should be thankful to proficiency of our government in general and the minister in particular.

Yet increases in direct personal tax rates should not be` on the national agenda. Not even a Labour Government that inherited a financial mess found it opportune to upset the consensus about income tax rates being capped at 35%. Last budget contained the unsocial measures of flattening the tax bands to increase the tax` impact on middle income families and therefore the government has little room to manoeuvre in this area.

The price of petrol was increased in three out of the last four budgets and if the consumer is to be protected from further increases and Enemalta shielded from direct losses, nothing short of reduction of excise tax or VAT on petrol will deliver the goods.

All this means that for next year fiscal enforcement to increase the tax revenue without raising tax rates seems to be the name of the game. This will keep the everybody happy and square the circle except that there is a point beyond which sudden enforcement on a struggling tax-paying sector of the economy( the export sector is generally on tax holiday) becomes counter-productive as it would flatten long term economic growth. Are we inching or speeding towards this point`

Alfred Mifsud

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