Deliverables No 3 and No 4 - Reduce tax burden

The Malta Independent  

No new taxes/tariff deal from the government to ensure that we stop the addiction to tax and spend policies.

 

1. A deal whereby additional revenues from better tax enforcement are allocated specifically as to 50% for reduction of the tax burden to the lower and middle sector of society, especially those in employment who never needed any tax enforcement mechanism to pay their tax dues, and 50% to fund re-training schemes.

I take these 2 deliverables together because whilst distinct they both concern a new approach needed for fiscal policy.

Small economies are particularly suitable for docile fiscal policies. In the old times when it was possible to build sharp dividing wall between the domestic economy and the international relations, small economies had the option to create offshore regimes where the docile tax treatment for international business was kept separate from the normal or harsh tax treatment of the domestic economy. This is no longer possible as international obligations for us to open the domestic economy for broadly equal treatment to the international business we seek to attract.

Consequently small economies have the incentive to adopt a docile tax regime where concessions made to their small resident population are more than compensated by the attraction of international business without infringing on international or community obligations. This is the route that Ireland has so successfully adopted.

Unfortunately our fiscal policy stance, conditioned by the past excesses and burgeoning imbalances, is forcing to adopt a restrictive fiscal stance choking our economy and depriving the exploitation of its true potential. This is being done whilst other much stronger economies are adding fiscal oxygen to their domestic economy even though this involves their breaching community-wide obligations as is the case with France and Germany regarding the single currency Stability and Growth Path.

In 2004 it is planned that tax revenue will increase to 41.1% of the GDP from 39.1% in 2003 and 37.8% in 2002. Clearly we are going the wrong way. We are administering on the economy fiscal medicine totally unsuitable for its malady.

Through Deliverable No.3 Government has to acknowledge that it has to change fiscal course and is to commit itself not to introduce new fiscal measures, further choking the economy, in a vain attempt to address the fiscal imbalances without addressing the politically sensitive expenditure side of the equation. If any new tax measures are necessary in the interest of control of tax-loopholes or in the interest of economic efficiency, government has to explain this, estimate the additional revenues so generated, and roll-back some other existent tax measure to compensate. Government must, as its part of putting together a tenable social pact, abandon its addiction to tax and spend policies as the ease with which the government can finance its expenditure by new tax measures on the fiscal sitting ducks of the economy (the middle income employees and the small self-employed) is diluting the national determination to address problems at their expenditure source.

Deliverable No 4 on the other hand addresses the additional tax revenue flows that the government collects through better enforcement of existing tax measures and through the normal increase in the tax take generated by economic growth.

Through this deliverable government is expected to bind itself not to fritter away the increased tax revenue from this source but to apply it for two very specific purposes. Half would be rebated back to the fiscal sitting ducks in order to roll back the tax crawl of the past few years in order to stimulate the initiative to work and produce, with the other half being specifically devoted to fund part of the investment required for the training needs identified in deliverable no. 2

These deliverable would impose upon government a fiscal discipline which can only be abided to if the government no longer has the soft escape from addressing fiscal faults at their source of politically advantageous expenditure. The practice of creating a false sense of feel-good factor in the run-up to elections which gives way to a sense of frustrations as we discover the true hard facts in post-election mode has to stop once and for all.

Political convenience at the expense of fiscal irresponsibility has landed us in the current economic sclerosis. On the political front it has rewarded us with an unimaginative government that has overstayed its term of office and is forced to resort to social pact solutions simply because it has run out of other ideas and needs a medium through which it shares the burden of governing under tight fiscal conditions.

Basically we have no alternative but to bite the fiscal bullet.