Friday, 24 November 2000

A Touch of Unreal

The Malta Independent

A Touch of Unreal

The Budget for 2001 was the fifth consecutive budget conditioned by the unacceptably high public sector finance deficit, the control of which demands attention prior to all other economic objectives.

The seriousness of the fiscal deficit has now been hammered so much in people`s mind that whereas the first two budgets were considered unacceptably harsh this fifth one has an air of general acceptability stamped on it for` the simple reason that it does not carry harsh specific measures which characterised the previous four. People have started to accept that they ought to be thankful for perceiving that they are not` being taxed too much more.

Whilst shorn of the specific tough measures which characterised last year`s budget yet total tax revenue is still expected to increase by Lm56 million over the revised estimate of` the current year which in itself is Lm62 million above that of 1999. The question everyone is asking is how is it that we shall collectively be paying nearly the same level of` additional taxes as this year without undergoing the additional tough measures as experienced this year` Does not this have a touch of unreal`

In reality there is a new measure extending the income tax base onto quoted collective investment schemes but this would not produce more than Lm3 to Lm4 million additional tax` revenue. There is a hidden increase in direct taxes as the inflation creep carries taxpayers across to higher tax brackets as their nominal wages increase but their real value stays static and effectively reduces through higher tax impact. Yet the larger part of the increase has to come from more rigorous enforcement of tax rules. This is the punch line of the budget.

Government had so little room for manoeuvring that in my column of 13th October last I had predicted `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

As the measures unfold those effected will find the next year`s` budget as distasteful as that of this year. Yet the budget has been skilfully structured to` make the individual suffer in silence. Protesting loudly would expose him or her as a long standing tax evader.

Whilst economically sensible this could be politically treacherous ground. This budget not only effectively addresses the public deficit by taxing the voter, it does so without giving him or her` an opportunity to profess discontent. This particularly effects the middle class sector that is fertile ground for the government`s political support.

This middle class is effectively being taxed for employment perks which through` prior long standing non-enforcement had embedded a standard of living higher than the` gross declared salary levels would normally permit. All this now has to be unwound.

When people are made to suffer without even being given an opportunity to say ouch!, discontent has a habit of showing itself through` one`s` solitude in the voting cabinet. !996 is not all that far to cancel memories. But as a mid-term budget the government must probably feel that` the political risks are acceptable and recoupable in subsequent budgets as government expenditure gets over the hump of the public sector` collective agreement expense and some real effort starts being made to control expenditure.` That shows why Labour 1998 exercise also made sense as a mid-term budget. Its only defect was that it was not at all mid-term!

Your editor hailed this budget as fair. This is one of those budget that any adjective would fit. You can call it` cheat as much as` fair. Politically the middle class will find itself cheated and hurt as the technicalities of the budget measures translate themselves into lowering of their standard of living. Economically it is a fair attempt to address the problem which this same administration created in the mid-90`s and which` five tax rich budgets have not yet been able to bring under control. That exposes the size of the problem!

Alfred Mifsud

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