Tuesday, 5 November 2013

Don't blame the Commission

One should not blame the EU Commission for not taking Malta's word through the Budget presented this week for 2014 when the Minister for Finance re-iterated that the deficit for 2013 will be 2.7% of the GDP as planned, and next year this will go down to 2.1%.

Normally the Commission would take Malta out of the Excessive Deficit Procedure (EDP) once we fall below 3% in the budget deficit in relation to the GDP.   But the Commission would not and should not just take our word for it.   They want to wait until the actual result for 2013 will be confirmed somewhere next April.

Why?  Because last year the then PN government when reading the failed budget just 33 days before the end of the year 2012 had promised to close the year with a deficit of 2.3% but in April it was discovered that the real deficit was in fact 3.3% and that landed us back in the EDP from where we had just exited.

For the Commission the Malta government is the Malta government and they do not care that it has changed, whether it is PN or PL, blue or red.  The government represents the country and the country is still the same.

The Commission is also having problems in accepting the budget deficit reduction progress planned for next year.   The Commission unfortunately uses economic models which do not take account of local realities and invariably they find it hard to accept that our income tax revenue increases at far higher pace than the nominal economic growth.   But time and again events proved that the government was right and the Commission was wrong - but still the Commission uses a standard model without sensitivity to local realities.

Consider this.    In 2012 the Income Tax revenue was Euro 866 million.   This year its was estimated to increase to Euro 928 million an increase of 7% well above the nominal rate of growth of some 4%.  This in spite of reduction of income tax rates from 35% to 32% for a good part of the upper  middle class.  Yet the original income tax revenue estimate for 2013 has been revised further upwards to Euro 959 million,  meaning that not only we managed to realise the 7% projected increase in income tax revenues but actually pushed it further up to nearly 11%.

The Commission can't understand how this happens.   So it cannot accept that income tax revenues for 2014 is expected to increase again to Euro 984 million up a further 2.6% on the revised estimate for 2013. Now 2.6% growth is conservative compared to the 11% registered in 2013 and merely covers the planned economic growth of 1.7% plus 1% inflation.    I am sure we can do better than that given our past performance and the emphasis government is making on fiscal morality to address tax evasion.

But don't blame the Commission for not understanding how our tax revenue increases more than economic growth.  The Commission does not share our best kept secret that a good part of the tax revenue growth comes from international business which is not captured by and makes no contribution to our GDP growth. That has to remain our best kept secret.  Better spend and extra year under the EDP rather than share our secret.

A lot of hoopla was made by budget critics about the increases in indirect taxation and other non-tax revenue.   But wait a bit.   VAT is expected to generate EUR 35 million more than 2013 up by 6% which is just nominal economic growth plus 2% from better enforcement.  No VAT rate increases or base expansion is involved.  So what's the problem?

Customs and excise is increasing by Euro 30 million but of this Euro 23 million is petroleum related which we are informed will add little to nothing to the retail price as it will be funded mostly from better procurement prices.   The remaining Euro 7 million comes from the usual suspects, cigarettes, tobacco, spirits and cement which is what normally happens in every budget.  So again where's is the problem?

Licenses and fines are on a net basis expected to increase by just Euro 2 million although one expects a shift to impact more environmental offensive uses and subsidise green uses.  Road licenses are going up but registration taxes are coming down so all in all the effect is quite neutral on government revenues.   So where is the additional burden of taxation?

The highest increase is in fees of office, for charges government raises for services it delivers which is increasing from Euro 39 million to Euro 60 million.   But this increase of Euro 21 million mainly consists of Euro 15 million from the International Investor Programme which will no no burden on local taxpayers.

Bottom line is that whilst government tax revenues will in toto increase by Euro 169 million next year most of this is additional revenue from economic growth, better enforcement and very marginally from increases in excise taxes which are then well compensated by utility tariff reduction.

Those who criticise the 2014 Budget on this score is because they have to criticise something and really there is not much to criticise.

For me the main cause of criticism is that the Budget  is too conservative on economic growth and government financial position should be better than projected as I would be disappointed if next year we will not register real growth of at least 3%.  


  1. Mr. Mifsud
    Say that what you predict actually happens and tax revenue indeed rises by more than GDP growth (say because growth accelerates beyond projections or revenue from international companies is more dynamic than expected), what would you suggest that the government does with that extra revenue: save it in a rainy day fund, spend it to stimulate the economy, spend it on social benefits, or use it to reduce the deficit further?
    It would be interesting to hear your thoughts on this.
    Looking forward to hear more of your views on fiscal policy in Malta.

  2. In the circumstances I would give priority to reducing the deficit further. The extra revenue would be a sign that the economy does not need further stimulus. Reducing the deficit further would enhance our credibility with Debt Ratiung Agencies, reduce the debt servicing cost and give us fiscal manouverability for future action when the economic cycle turns down.

  3. If the 2013 budget was a failed budget, how come the Labour government used it with just couple of tweaks here and there. And I thought the projected deficit was 2.7% which was in line with what the Central Bank of Valletta were forecasting.


    Didn't the Nationalist government project their revenue streams on future economic growth, something which the current government is now doing.

    What do you mean when you say that tax revenues from international business are not captured within the GDP. Define international business? Do you mean, taxation on local companies doing trade with foreign companies? Or companies outside of Malta who have a tax domicile here to take advantage of lower tax rates?

    So by your logic, anyone who pays tax on 'international business' is not contributing to the economic growth of the country.

    1. The original 2013 Budget read in parliament on 28.11.2012 was a failed budget as it failed to gain approval of the House.

      The deficit for 2012 prjected in the same Budget speech was 2.3% - see Table 2.1 in the same speech.

      International business which has no basic Malta connection ( i.e. no real exports or imports but business booked through malta mainly for tax management reasons) does not contribute directly to local production and is not captured in GDP statistics.

      I did not say that this tax revenue does not contribute to economic growth.