The Malta Independent on Sunday
Now that the lights are down and the festivities are over, the honeymoon period will only carry us till the 12th June when the elections for European Parliament are due. Beyond that there lie the threats and the opportunities which can break us or make us.
Unfortunately one has to be unrealistic to feel positive about the way we are positioning ourselves for the challenges ahead. We still seem to think that EU membership on its own will cure our ills and that we can expect an influx of foreign investment and new job opportunities purely because we will be perceived better by investors as an EU state.
It just does not work that way. This week we had a rude reminder, for those who are willing to read the sign of times and not be blinded by the demagoguery of celebrations and preparations for EP elections, of how much the other 9 acceding countries have progressed on the road of successful economic restructuring.` A stark comparison of how much better they are position themselves to make the most of EU membership.` They are just leaving us behind.
Making the most of EU membership will in the final analysis have to be measured in terms of the increase in foreign direct investment flows that membership generates. To make sure that the wave of pre-accession investment continues after membership, the other 9 acceding countries have all embarked on a fiscal reform reducing corporate tax to a range between 12% and 21%.
This policy makes sense for countries in an early stage of development, especially those with small populations. Concessions made in the domestic corporate tax regime reduces the tax take from the domestic base. But this is more than compensated by` the attraction of` new foreign direct investment which generates economic growth and ultimately increases the tax flows to the Exchequer whilst providing jobs and macro-economic stability.
This policy is proving so successful that right in the week of celebrations leading to the 1st May accession date, German Chancellor Schroeder found it necessary to spoil the fun by warning the new candidates that Germany does not appreciate at all their reducing the corporate tax rate so much. Schroeder complained that this creates unfair tax competition.
Schroeder is half right in arguing that way. As the major contributor to the EU Budget, Germany finds it hard to accept that its money is subsidising new accession countries to develop their own economy and attract foreign direct investment by offering across the board lower corporate tax rates. But half right is not good enough.
The purpose of the enlargement is to permit quick economic integration of the candidate countries helping them to achieve average EU GDP levels in the shortest time possible. This would only be possible if investment flows move from the high cost high tax countries like Germany to low cost low tax countries like Hungary, Czech Republic, Slovakia, Poland etc. etc.
The promise of accession to EU membership has forced on these countries the determination and willingness to accept the pain of rapid economic re-structuring.` Countries like Germany have on the other hand moved very slowly towards re-structuring leading to anaemic economic growth, high unemployment and loss of investments that relocate to more flexible and competitive economic environment offered by the 8 east European acceding countries.
Rather than begrudge the right of new acceding members to administer fiscal policy, which is still a matter of domestic jurisdiction, to their best advantage in order to travel as fast as possible on the road to economic integration, Germany would do well to consider this challenge as an opportunity to press on with its own reforms.
Failing this it is quite unfortunately possible that come next year, when negotiations for the EU Budget provision for the years 2007-2013 will reach their climax, Germany, in recognition of its re-dimensionised economic status, will make the argument to a fairer distribution of the burden of financing the EU.` It will pull back its budgetary contribution.
All this is interesting, but where does it all leave us in Malta It leaves us with a bad taste that whereas other acceding countries are scoring high on the attraction of foreign direct investment, aided further by the adoption of docile corporate tax regimes,` in Malta we have not seen any influx of foreign investment and we have been travelling on the opposite fiscal road, that of raising the fiscal burden.
Our corporate tax rate of 35% is high enough to put us off the consideration list of any supplier of FDI seeking the best location inside the EU. The mechanisms of the Business Promotion Act on how this could be effectively reduced provide an unattractive, confusing and unappealing substitute, which is in fact no substitute at all.
Our past excesses of lax public spending has placed us in a fiscal tight spot that is prohibiting us from claiming the opportunities of EU membership by offering competitive corporate tax rates to attract new investment.
When the lights are down and the celebrations fade into history it is such experiences which will decide whether we dwindle or prosper inside the EU. It is these experience which will decide whether we want to emulate Ireland or Greece. Unfortunately we are leaving our EU fortunes hostage to chance by continuing to talk about restructuring and social pact, whilst effectively doing pretty little about them except the extravagance of using our precious tax money to send able-bodied persons in early retirement.` Some restructuring!
Now that the lights are down and the festivities are over, the honeymoon period will only carry us till the 12th June when the elections for European Parliament are due. Beyond that there lie the threats and the opportunities which can break us or make us.
Unfortunately one has to be unrealistic to feel positive about the way we are positioning ourselves for the challenges ahead. We still seem to think that EU membership on its own will cure our ills and that we can expect an influx of foreign investment and new job opportunities purely because we will be perceived better by investors as an EU state.
It just does not work that way. This week we had a rude reminder, for those who are willing to read the sign of times and not be blinded by the demagoguery of celebrations and preparations for EP elections, of how much the other 9 acceding countries have progressed on the road of successful economic restructuring.` A stark comparison of how much better they are position themselves to make the most of EU membership.` They are just leaving us behind.
Making the most of EU membership will in the final analysis have to be measured in terms of the increase in foreign direct investment flows that membership generates. To make sure that the wave of pre-accession investment continues after membership, the other 9 acceding countries have all embarked on a fiscal reform reducing corporate tax to a range between 12% and 21%.
This policy makes sense for countries in an early stage of development, especially those with small populations. Concessions made in the domestic corporate tax regime reduces the tax take from the domestic base. But this is more than compensated by` the attraction of` new foreign direct investment which generates economic growth and ultimately increases the tax flows to the Exchequer whilst providing jobs and macro-economic stability.
This policy is proving so successful that right in the week of celebrations leading to the 1st May accession date, German Chancellor Schroeder found it necessary to spoil the fun by warning the new candidates that Germany does not appreciate at all their reducing the corporate tax rate so much. Schroeder complained that this creates unfair tax competition.
Schroeder is half right in arguing that way. As the major contributor to the EU Budget, Germany finds it hard to accept that its money is subsidising new accession countries to develop their own economy and attract foreign direct investment by offering across the board lower corporate tax rates. But half right is not good enough.
The purpose of the enlargement is to permit quick economic integration of the candidate countries helping them to achieve average EU GDP levels in the shortest time possible. This would only be possible if investment flows move from the high cost high tax countries like Germany to low cost low tax countries like Hungary, Czech Republic, Slovakia, Poland etc. etc.
The promise of accession to EU membership has forced on these countries the determination and willingness to accept the pain of rapid economic re-structuring.` Countries like Germany have on the other hand moved very slowly towards re-structuring leading to anaemic economic growth, high unemployment and loss of investments that relocate to more flexible and competitive economic environment offered by the 8 east European acceding countries.
Rather than begrudge the right of new acceding members to administer fiscal policy, which is still a matter of domestic jurisdiction, to their best advantage in order to travel as fast as possible on the road to economic integration, Germany would do well to consider this challenge as an opportunity to press on with its own reforms.
Failing this it is quite unfortunately possible that come next year, when negotiations for the EU Budget provision for the years 2007-2013 will reach their climax, Germany, in recognition of its re-dimensionised economic status, will make the argument to a fairer distribution of the burden of financing the EU.` It will pull back its budgetary contribution.
All this is interesting, but where does it all leave us in Malta It leaves us with a bad taste that whereas other acceding countries are scoring high on the attraction of foreign direct investment, aided further by the adoption of docile corporate tax regimes,` in Malta we have not seen any influx of foreign investment and we have been travelling on the opposite fiscal road, that of raising the fiscal burden.
Our corporate tax rate of 35% is high enough to put us off the consideration list of any supplier of FDI seeking the best location inside the EU. The mechanisms of the Business Promotion Act on how this could be effectively reduced provide an unattractive, confusing and unappealing substitute, which is in fact no substitute at all.
Our past excesses of lax public spending has placed us in a fiscal tight spot that is prohibiting us from claiming the opportunities of EU membership by offering competitive corporate tax rates to attract new investment.
When the lights are down and the celebrations fade into history it is such experiences which will decide whether we dwindle or prosper inside the EU. It is these experience which will decide whether we want to emulate Ireland or Greece. Unfortunately we are leaving our EU fortunes hostage to chance by continuing to talk about restructuring and social pact, whilst effectively doing pretty little about them except the extravagance of using our precious tax money to send able-bodied persons in early retirement.` Some restructuring!
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