Budget 2017

2

The Malta Independent on Sunday | 23 October 2016

Making sure that th wealth reaches ever On taking office in 2013 the incoming government found an economy in distress.

The country had been placed under an Excessive Deficit Procedure by the European Commission as various entrenched challenges affected the sustainability of its public finances and its potential growth. Macroeconomic imbalances pertaining in particular to the financial sector and public finances were identified among the main ills that affected the Maltese economy. In 2012 the annual deficit reached 3.5 per cent well above the EU benchmark of 3.0 per cent, while the national debt as ratio of GDP amounted to 69.9 per cent.

In 2012 the unemployment rate was 6.3 per cent while labour participation rate was at 65 per cent. Shortcomings in the labour market included the failure to maximise the island’s human capital, address skills gaps and establish improved links with education and training. In order to raise the female participation rate and facilitate the integration of women in the labour market, the Commission recommended that affordable child-minding facilities be made available.

The Commission also expressed concern at inadequate reforms in pensions and healthcare and regarded the energy sector as posing a significant challenge to the competitiveness of the Maltese economy.

Not one to shy away from a thorny situation, the Labour Government immediately launched an economic recovery plan and successive budgets were aimed at measures that would contribute towards economic regeneration.

The first budgets of the current administration promoted stability and confidence and launched measures aimed at a new economic environment conducive to investment and employment and to higher disposable income levels. Diligence and work were rewarded and encouraged; income tax rates were lowered; tax credits and benefits were introduced; free childcare facilities were launched; voluntary pension reforms were rolled out; and energy rates went down.

Reforms in the social welfare system provided a set of incentives including in-work benefits to reduce welfare dependency while promoting an enabling state. Assistance was also extended to first time buyers.

Between January 2015 and August 2016 the number claiming unemployment assistance and social assistance declined by over 3,300 claimants. Most of these are now in full employment contributing to their pensions through national insurance while others have taken advantage of the taper of benefits and moved into employment.

By and large these measures have been a success. As the country experienced significant economic growth under the current administration, national income rose by 15 per cent and employment levels increased by 13% while household disposable income went up by 28 per cent. Labour participation rates have

3

The Malta Independent on Sunday | 23 October 2016

he country’s new rybody

increased from 61.6 per cent in 2011 to a forecast of 68.2 per cent in 2017 while the unemployment rate has fallen from 6.4 per cent in 2011 to 4.9 per cent in 2016.

The 2017 Budget that was announced

by Minister for Finance Prof. Edward Scicluna on 17 October 2016 sought to build on the results of previous years and further strengthen the Maltese economy by a wider range of incentives to encourage more workers to join the labour force. The Budget recognized the need to ensure that our young people will acquire the necessary skills set to meet the needs of the Maltese economy; improve access to finance for enterprise; and further strengthen and improve the infrastructure.

Besides seeking to exploit to the fullest possible extent the full potential of the Maltese economy, the 2017 Budget confirm the government commitment to prosperity with social justice. This is in fact the underlying rationale of the

budget exercise for 2017 – the need to promote wider social justice among sections of the population that are unable on their own to participate in the ongoing development process. This includes pensioners, low income workers, disabled persons and recipients of social benefits.

Government is confident that on the back of a buoyant economy it can meet these developments without any undue strain on its overall financial position.

In addition to the weekly rise of €1.75 announced in the 2017 Budget to cover the increase in the cost-of-living for October 2015 to September 2016 to all employees, pensioners and those on social benefits, the main measures to address the situation of pensioners include tax exemptions on pensions up to €13,000 over a two-year period; a weekly increase of €4 to married pensioners on the national minimum pension; and an additional set-off of €200 to holders of a service pension which is expected to reach 5,000 beneficiaries.

The Budget 2017 makes provision for reform of the carers allowance which increases from €105 per week to €140 per week while the carers allowance increases from €76 per week to €90 per week. This would allow our citizens to continue to live in their own homes and in their communities. The Budget also seeks to increase the disability allowance while extending eligibility to amputees.

The Carer at Home project is also being extended.

The extended in work benefit paid to families with one earner is also being improved from €150 per child to €350.

In the meantime eligibility to the extended in work benefit also means that more families will become eligible.

Addressing the working poor the government is also extending the Supplementary Allowance to low income families so that more families become eligible to the benefit.

The provisional estimates show that low income families eligible to both the extended in work benefit and the supplementary allowance will seek their incomes improved between €5 and €9 per week according to the number of children With regards to the housing sector, the Budget 2017 provides for the doubling of the rent subsidy to vulnerable people with aim being that of doubling the number of beneficiaries to 2,800. Furthermore, rent adjustments for government-owned premises for 2010, 2013 and 2016 are being withdrawn and the amounts already paid by tenants are being refunded.

Other measures that feature in the Budget 2017 include a revision of the means test and the introduction of more realistic thresholds for the eligibility of persons for non-contributory benefits.

The reform of the means test means that more senior citizens will now become eligible to free medicines under the pink card.

In addition there is the launching of a government savings bonds for pensioners at more attractive rates than those

currently available on the market to enhance their income levels.

The Budget also makes provision for an allocation of €8 million for the launching of a new fund for the settlement of past grievances mainly relating to pensions rights and claims of former employees of a number of public sector organizations. The fund will be administered by a board that will carry out the necessary consultations and establish procedures on which requests by aggrieved pensioners will be considered.

Other measures that are planned to be undertaken in the context of the Government’s commitment to build a more inclusive society include the launching of a social fund to address the quality of life of students in difficulty by means of sports and cultural activities; the introduction of a respite service for carers who provide assistance at home to individual dependants; the continuation of the Soċjetà Ġusta project aimed at having 10 small homes in the community for

persons with disabilities; the continuation of the project REACH in Naxxar to provide different professional services to a wide range of persons including persons with disabilities; and the establishment of the Ċentru Sigur għaż-Żgħażagħ Bniet.

In the housing field 2017 will be witnessing the construction of the first units in the social housing project estimated to cost some €50 million while the Housing Authority will be launching a six-year programme for the installation of lifts and for improvements in 211 houses in various residential estates throughout the country for some 4,400 persons, including 1,200 elderly citizens and 200 persons with disabilities.

The Government is confident that on the basis of this wide-ranging programme it will be able to fully honour its commitment to ensure that no Maltese citizen will suffer from any form of economic deprivation or social exclusion in the years ahead.

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The Malta Independent on Sunday | 23 October 2016

Traffic and environment concerns for university students ■ Julian Bonnici The general feeling amongst university students following Monday’s Budget 2017 presentation is that whilst the government was keen to help the vulnerable members of society, they failed to address the traffic situation and environment properly.

The traffic problem was clearly a hot button issue for the university students the Malta Independent spoke to. A majority expressed disdain at the amount of time they spend in traffic in the morning on their way to a lecture, with a majority saying that they have to leave home at least an hour before their lectures begin at 8am.

A 19 year old male law student jokingly remarked that he would have never got his driving license if he knew it meant that he would be stuck in traffic half of the time. He then said that he feels like nothing concrete is being done to tackle the situation.

The initiative which will see people who turn 18 in 2007 be given a year of free public transport was met with mixed reactions. A large number of the students, even though they will not benefit from the service, praised the government’s

intention to get young people to use the bus far more often.

A 23 year old female student from Attard pointed out, that most of them felt that the initiative should have been extended to all students in secondary and tertiary education.

This she said would certainly help with the traffic problem Malta is facing today, since a

majority of university students would use the bus instead of their cars; she also wondered why the initiative was directed at individuals who may not even have their driving licenses until the end of that year.

The environment was another issue of concern for the students, with a majority of them placing a particular interest in

the lack of public space, pedestrianised zones, and over development.

A 22 year old female commerce student from Birkirkara said that she would have liked to see the government take greater initiative in protecting public land and invest heavily in its conversion to large public spaces. She used Manoel Island,

White Rocks and Jerma Hotel as examples of occasions were the government should intervene and invest to make public parks which the whole community can enjoy.

The students did praise the government’s initiatives involving solar panels, saying that greener energy was the way forward. With regards to the LNG Tanker based in Marsaskala bay, a number of them seemed to be content with the government’s focus on introducing cleaner energy to Malta, but also expressed concerns regarding safety and the lack of transparency in the project.

A 21 year old male student reading English, complained mainly about the lack of reduction in water and electricity bills. He said, that as a student who also works and lives alone, a reduction would have helped him out significantly, remarking that he expected something to change following the government’s claims of the economic boom the country is experiencing at the moment.

The students also jokingly complained about the usual increase in the cost of tobacco and alcohol, with one man saying that “It felt like the government was on a mission to stop students having fun”.

Pensions, toiletries, construction materials and traffic – varying reactions to Budget 2017 The introduction of the excise duty on toiletries and detergents and the government’s failure to combat the traffic situation in the Budget 2017 was criticised by members of the public, but they also praised its ability to tackle issues concerning low-wage earners and pensioners in a vox pop conducted

by The Malta Independent in Valletta.

A majority of people that spoke to The Malta Independent praised the budget for providing for those who are in need and vulnerable. A bulk of pensioners seemed to find no fault with a budget that was favourable to their demographic. A woman said that it was a budget that showed that the economic prosperity had to be shared with everyone.

One man remarked that he had “never seen a budget like this”. The same man did however say that he was disappointed that the government neglected solving the traffic problem, but also said that this was a longstanding problem that had not been dealt with, and the annual increase of cars on the road has only worsened the situation.

A man however complained that while the budget is favourable toward those in need, he feels that, in his respect, expenses have only increased. In spite of being a hardworking contributor to society he will now need to pay higher taxes due to increased pensions.

Two women placed particular disdain on the introduction of an excise duty on toiletries and other household items. The budget, one of the women claimed, does not benefit it her at all, going as far to say that “it

took more than it gave”. The proposal, she said, would impact her daily expenses whilst the other woman remarked that it would mean that a majority of housewives would not be able to spend their money on other activities.

The concern with the excise duty on toiletries was echoed by a number of other people, with one man saying that for him the budget was “nothing, it’s probably a bit bad for myself, since the price of daily household items has increased”.

One of the women also criticised the extension of the firsttime buyers scheme and the tax on construction material. This, like before, will only increase prices in the already expensive property market, which is already a massive burden on the incomes of the younger generation. She went on to say that government should have instead focused on reducing the traffic problem, which has gotten out of control.

Both of them seemed to agree that the budget would only be detrimental to smaller busi-

nesses.

A man also felt that the government did not deal with the most important issues facing the country at the moment, placing particular interest on Air Malta. The man said that he fears that Malta’s national airline would fail without proper government intervention. Currently, the negotiations between Air Malta and Alitalia seemed to have stalled with Prime Minister Joseph Muscat saying multiple times that he is willing to “pull the plug” on the deal.

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The Malta Independent on Sunday | 23 October 2016

The budget from a business perspective be reduced by the reduction of the maximum duty rate from 5% to 1.5% upon the transfer of such businesses to the younger generation.

■ Austin Demajo This budget has been coined as one that mainly addresses social issues. However it goes beyond that, introducing a number of fiscal measures which continue to build on Malta’s competitiveness, stimulating economic growth by measures intended to inject liquidity into the economy.

Bold corporate tax reforms will be introduced as from next year.

The introduction of Notional Interest Deduction (NID) will bring companies capitalised via equity on an equal footing to debt financing as this measure should allow companies to claim a notional interest deduction at a percentage of their equity. This favourable tax treatment should act as a stimulus in reducing indebtedness of companies. Interestingly, it was only last 14 June that the Swiss Parliament voted in favour of the introduction of NID as part of the Swiss Corporate Tax Reform. Other EU member States that have NID in their corporate tax system are Belgium, Cyprus and Italy.

The Minister for Finance also announced another measure by virtue of which a group of companies will be able to determine the tax base on a group consolidated basis. Currently, members of a group determine their tax base and tax payable on a standalone basis, and, more often than not, the resultant tax due of the group exceeds the amount that would have been due had it been calculated on a group basis; this in view of certain antiquated limitations on deductions. Group taxation ensures that a group pays tax on group profits, thereby improving liquidity of the business.

Businesses do not usually fail because they are not profitable but because they face difficulties in raising the necessary finance.

To address this problem, the budget introduces an incentive for SME funding by way of the Risk Incentive Scheme whereby investors in a SME, or a fund investing in a number of SMEs, listed on an alternative trading platform, such as Prospects, will benefit from a tax credit of up to €250,000 per annum.

The announced measures also address another liquidity problem faced by business owners in the transfer of their business across generations. Liquidity problems are exacerbated by duty payable upon the transmission of business entities to the next generation. The impact will

Other important measures are the Accelerator Programme to assist niche local businesses, new schemes to be introduced by Malta Enterprise in the form of

tax credits mainly for start-ups, and a capital gains exemption on the sale of listed shares held prior to listing on the Malta Stock Exchange (a reduction from 15%).

Mr Austin Demajo is a Partner at Grant Thornton

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The Malta Independent on Sunday | 23 October 2016

Middles-Class loses out, lower earners make small gains, pensioners the biggest receivers The Malta Independent newsroom worked out an exercise by computing the monetary benefits announced in the Budget for 2017 against the increase in expenses for three different sectors in society: low income earners, middle-class earners and pensioners. This is a general approach to the figures published during the budget speech. This newsroom did its best to represent the benefits and increases in the best and fairest way possible however, different conclusions could be reached for particular pockets of society which were singled out during the budget.

Pensioners are the biggest receivers in next year’s budget as announced by the Minister of Finance Edward Scicluna early last week.

From an independent exercise computed by this newsroom it turns out that pensioners will receive an average of €418 in benefits thanks to the new measures announced for 2017. This may be a little lower or higher according to the type of pension of each individual. On the other hand, new expenses announced in the budget will affect pensioners averagely at approximately €60 in one year. Other increases in daily needs over the course of the year couldn’t be taken into consideration.

The budget for 2017 has been branded as one with a social conscience by several NGOs and government itself. In fact, low income earners will benefit from an average increase of €480 in 2017. However, the introduction of excise duties on an array of products will affect low income earners by at least €120 in 2017.

With a net increase of €208 in disposable cash in hand one asks whether such will elevate families struggling to cope out of their misery.

On the other hand, the sector of society which can be described as middleclass is the loser in this budget exercise. When considering that benefits from the Cost Of Living Adjustment (COLA) and a higher in-work benefit awarded by Government, the middle class will gain (give and take) €352 in one year. On the other hand, conservative workings on higher expenses which could affect the middle class shows that the benefits announced will be completely wiped out for this section in society leaving it in the red with an average of €19. These workings do not take into consideration higher prices of products and services consumed mainly by this sector as an indirect effect to the increase in excise duty on construction and personal care products.

Typical family of four, Low Income Earners with one source of income: Increase in 2017 (€)

COLA Special COLA Average: Higher ceiling for In-Work Benefit (2 children under 23 years) Estimate increase on cost of toiletries & personal care products One person smoking Excise tax on non alcoholic drinks (5 litres per week) Increase on black bags (365) Total:

Difference

IN

OUT

91 117 200 80 63 52 4.38 199.38

408

+€208.62

*If at least one child is 18 years of age the family will benefit from a reduction in public transport costs of approximately €260 in 2017 Typical family of four, Middle Class Earners with two sources of income: Increase in 2017 (€)

COLA (2 working adults) Average: Higher ceiling for In-Work Benefit (2 children under 23 years) Estimate increase on cost of toiletries & personal care products One person smoking Excise tax on non-alcoholic drinks (8 litres per week) Increase on black bags (400) Average effect on Maintenance/construction Total:

Difference

IN

182

OUT

170

352

120 63 83.20 4.80 100 371

-€19

*If at least one child is 18 years of age the family will benefit from a reduction in public transport costs of approximately €260 in 2017

Pensioners COLA Average removal of Income Tax Estimate increase on cost of toiletries & personal care products Increase on black bags (365) Average effect on Maintenance/construction Total:

Difference

+€358.62

IN

OUT

418

30 4.38 25 59.38

208 210

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The Malta Independent on Sunday | 23 October 2016

Budget just the first step in addressing issues faced by those in poverty – Caritas Director This year’s budget is just the first step in addressing issues relating to those at risk or already in poverty, Caritas Malta Managing Director Leonid McKay has said.

Mr McKay was being interviewed by The Malta Independent’s Content Director Pierre Portelli, in a newly launched programme called INDEPTH which is available on www.independent.com.mt.

The programme dealt with the budget and those on benefits, at risk of poverty and in poverty.

Mr McKay explains that if the state does not continue to build on this year’s budget, then the voices of those in poverty would be extinguished.

Quoting the National Statistics Office, in 2014 there were 66,000 people living in poverty.

Pressed on whether he believes previous budgets ignored this sector of society, Mr McKay replied, “I’m not saying they were ignored, I’m saying that this budget focuses directly on them”.

He agrees however, that this section of society has been ignored for long enough.

Mr McKay was pleased to note a shift in rhetoric when it came to discussing low income persons and those on social benefits. “Over the past years I heard ministers speaking about persons on social benefits as being lazy, as if they choose to be on social benefits”.

He said that the majority of persons on non-contributable social benefits do not have a choice. There are a number of reasons they would be on such benefits including illness, social problems and work-related accidents.

Turning directly to the 2016 Caritas report, that had sparked much debate about persons in poverty, he said that the aim of the study was to identify a line, in terms of income, where persons cannot live decently with any wage below it.

Mr Portelli asked: “Caritas deals with these people directly. Can you paint us a picture of who are these people who are so desperate that they need our help?”

“Caritas has direct contact with these people, and they knock on our door every day.

We just launched a service together with the Ministry for Family and Social Solidarity and the Alfred Mizzi Foundation, where we opened a shelter for persons with particular problems.

“The poverty situation is not the same as it is on elsewhere in Europe, where there are people begging in the street. People in Malta face problems, including those related to housing issues and come for temporary shelter as they don’t have a roof to sleep under. There are also situations where they cannot pay rent”.

Given that Malta has a very high level of employment, he was asked how those on benefits cannot find work.

Leonid McKay “The reality is that there are people who have substance addictions, foreigners among us who had high expectations in terms of type of employment and ended up unemployed.

There are those who genuinely cannot find work for diverse reasons. And here is where the state needs to intervene”.

He said that the majority of issues he has seen are not because of the economic situation, but are instead related to personal and family issues.

Mr Mckay did highlight certain disappointments with the budget. One such problem relates to food prices, another with the explosion in rent rates.

“We need to be careful so that the help being given is enough for those to cope with the market”.

Mr Portelli pressed the interviewee, on whether the financial increases in the budget could result in persons no longer, statistically, be classed as being at risk of poverty, although in reality would still be.

“If the aid being given by the state is much less than what these people need in order to cope with market prices, then they will remain in the statistics,” said Mr McKay, who also stressed that policymakers must understand the need for these people to be given what they deserve.

He was asked whether the increase in toiletries and personal care would eliminate the good done through the budget, and whether he believes an energy tariff cut was needed.

In response, Mr McKay said: “It’s a political decision. As Caritas we believe that if one has to burden persons on social benefits and those on the minimum wage, they should not do so on essential items such as toiletries”. The idea that one balances out the other could be a true,” said Mr McKay. Turning to rents, he does not believe that enough was done in the budget to alleviate the problem. He mentioned that many of those who come to Caritas face problems regarding rent costs. He again stressed that this budget must be seen as just being the first

step. “The state must look at this problem in further detail”.

He mentioned a pilot project involving 100 families will see the drawing up of a seven-year contract for low-income families renting property from private individuals, expressing his

interest as the results from this project.

Turning to a budgetary measure on transport, where those turning 18 would be able to utilise public transport for free, Mr McKay agreed that extending this to those in poverty should be considered in future budgets.

He was also asked about the living wage, explaining that he is in favour of it, but also believes the minimum wage needs to be discussed.

Mr McKay also avoided saying whether this year’s budget has failed the Caritas poverty test.

Nationalist MPs Paula Mifsud Bonnici, Robert Cutajar, Stephen Spiteri previously indicated that the Caritas poverty

report found Maltese families with two children and one parent, on the minimum wage, require €11,446 to get by, an €800 increase when compared to 3.5 years ago. They argued that the budget will not make up this difference. They also called it a “cosmetic budget” Asked whether he agrees with the PN, that the budget failed the Caritas test, Mr McKay would not say.

“I will not enter into political controversy,” he said, while adding that through the budget the voice of those who are at risk of poverty is being heard.

“But it is only the first step.

This, for me, is the criteria for this budget and I cannot say whether it has failed or passed the Caritas test.”

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The Malta Independent on Sunday | 23 October 2016

The four main area how each budget ha Finance Minister EDWARD SCICLUNA meets with Helena Grech in order to fill us in on what the government’s term plan is and how this budget fits into the grander scheme of things.

Professor Scicluna divulged the systematic approach taken by this government to tackle issues in various sections of society.

Some criticised the budget for lacking vision. How does the 2017 Budget fit into the government’s long-term plan?

Even before the budget we had a plan. I was part of a team and we costed every measure over time, ascertaining whether the country could afford it.

Now we are just implementing the plan. For the very first budget, that is the previous government’s budget, our plan was to accept it. It was a bold decision. The reason we did that was because certain promises were made to the public and they had to be honoured.

For the sake of continuity and stability, circumstances demanded that we get on with business; it was already March/April. The budget takes a year so if we were really going to be serious about our own budget, we had to stick with the plan.

For our first budget, we concentrated on bringing people into the workforce, and making work pay. So we had the first time buyer measure, and then the whole gamut of tax measures on women because that was a hidden resource for Malta. We wanted to get them out into the workforce and remove the obstacles. We did this through the free child care centre measures and various others. We had this plan of making work pay. We used to speak about long-term unemployment, but it was for nothing if it paid people to stay at home and remain on benefits. Why would they lose all the benefits and get less pay? Thank you

very much I’ll stay at home.

They were rational.

The second year was to take people away from dependencies, so to speak. We removed the dependency as much as possible by striking a deal. We said you can keep 2/3 of the benefits if you find work. The Employers association were against it because they said it does not make sense to have two workers doing the exact same job, where one is earning minimum wage and the other is earning minimum wage plus benefits. Sorry, that (paying benefits) was an expense already so we managed to get the person into the work force and proud of working.

So first was making work pay, and we managed. Then we promoted work rather than dependency, and then we also addressed the problem of precarious work and minimum wage work. It was established that yes the minimum wage is not much and it’s not enough.

That is a market decision because that minimum wage is reflecting the person’s productivity in that particular sector. The norm is people having better and better wages but workers in the declining industries get remain with the minimum wage.

So we had to supplement it with the in work benefit. The in work benefit was tuned to get the partner to work and if they (a couple) both managed to work they would get €1,000 per child. This year, we went further and addressed even those women who can’t work, and we will give them €150 per child.

So you managed to bring people into the workforce and reduce dependency.

What happens next? The Opposition made slammed this government heavily for not looking after the poor.

Looking back with hindsight, before we came to this budget we asked ourselves what we have obtain so far. We realised that poverty could come from four sources. For starters, these are a lack of work and very often a lack of education.

By making people work and getting them into the labour force we are helping the poor. I mean those who are already working are doing relatively

well. Those who were not doing well because they were unemployed - the single parents, the unemployed, those on social benefits, the 3,230 who came into the workforce and off benefits - we helped them while creating work and getting the economy to create the wealth we needed. We did the studies and the effect of tapering an in work benefit is that it hits the poorer and more vulnerable people.

The second area is the working poor, which we are addressing with in work benefits. With that scheme you are better off because you are on minimum wage plus you have the added bonus from the in work benefits.

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The Malta Independent on Sunday | 23 October 2016

as of poverty and as tackled them

“ ”

We used to speak about long-term unemployment, but it was for nothing if it paid people to stay at home and remain on benefits. Why would they lose all the benefits and get less pay?

The third reason for poverty is retirement. Why? Because from a full working life with overtime and so on, bang that stops and you are on a pension, and this is not adequate compared to your previous lifestyle. You really have to have a lot of assets so to speak to compensate for that lack of income. But the thing is that you had those assets before plus you had your work, which means that whatever the case you need to live off less.

The fourth reason is the whole gamut of social problems - disability, sickness and all the vulnerable people who have to rely on social benefits. In our government’s three budgets we tried to address the first two.

Last year, for this year, we addressed the pensions, we had a budget and there were so many ideas including those of the pensions working group, but we didn’t adopt those.

They said start from the 75 but I said look, let’s raise the floor and make sure nobody would be below that. We ensured that nobody in Malta on a pension was receiving less than 140 a week. For those who were married we gave an extra four euros per week for the partner not earning a pension, but then we supplemented that.

This year was not a question of now being the time to start sprinkling benefits everywhere simply because wealth is being created. We said we are going to address the third group – the retirees and the people on social benefits. They were only peripherally touched because even for

the middle class, we had already raised the ceiling and removed some income tax. This year we went with a bigger bang on pensions. In fact, we have a packet of 20 measures directly affecting pensions.

Plus there are others that will also affect pensioners indirectly.

For example if we spent millions on cancer pills, that expenditure would also affect them.

We then focused on social assistance because every time you cut taxation you are only hitting those who pay tax. What about the others? Some countries have a negative income tax whereby the government starts writing cheques to compensate for lower earnings. We have a system of social assistance but we are not prepared in Malta to have a very fair income tax. We have a patchwork system of social assistance for different circumstances. The hardest job was to figure out how they overlap and to ensure that nobody is missed and is allowed to slip through the loops.

With income tax reductions we are not affecting the poor, with the income tax reductions we are affecting every pensioner in Malta including those in the middle, upper, lower you name it – anybody who pays tax.

We are raising the ceiling from the norm of €9,100 for single people and €12,700 for married couples, which is the accepted and that’s what we have. In two years we are raising it from €9,100 to €13,000 which is nearly €4,000 and in two years, and that puts €585 in one’s pocket.

For those who are married we have a differential, so even though the wife does not have a pension we gave €1,000 tax-free, from €13,000 to €14,000. So that €1,000 extra is not taxed no matter where it comes from, and it is not tied to a pension. The source of a pension could be anything – contributory, noncontributory, treasury, foreign you name it.

This budget seeks to address injustices from the past, through an €8 million fund. Can you tell me more about this?

We have a package of €24 million and added €8 million to that, which will hopefully start to address so many anomalies that were created by the change in the pension system.

First of all, they cannot all be addressed by the budget and they can also take years to address. Also, according to Eurostat, we couldn’t even accept the claim on the books. If we were to do so, it would be ours and the deficit would shoot up. So

what we did in an intelligent way was we created a fund , we put €8 million in for the next year, and next time it could be €6 million or €10 million depending on how much the government can afford. These groups will be addressed accordingly.

We have mapped certain injustices, and some of them are so small but they hurt so much.

One of them was the means test – it was very cruel. It was unfair that two persons in different households have the same income, and one cheats whereas the other is honest. Both of them have, say, €10,000. One of them cheats and hides it under the mattress, while the other is honest and puts it in the bank.

When government checks to make sure that a person meets the criteria for, for example, the pink slip, we see that this person goes beyond the threshold and that person gets taken off the pink slip list.

Now it is the income rather than the assets that is being reviewed. Many of these people inherited, for example, onetenth of a house in Bormla and it would be unfair for that person to not meet the means test threshold and for what - what is he going to get for that asset?

This is also the case for the rent subsidy. It is no secret that rents have gone up. There are 1,500 people at present getting a subsidy. Over time we calculated a 70-80 per cent increase from the last change. We also doubled the number of beneficiaries from 1,500 to 3,000 by widening the means test threshold. So the Housing Authority will widen the means test in such a way so that another 1,500 will be added.

There was also a group of 12,000 persons, most of them women, who, and it was so unfair, paid two or three years of National Insurance contributions but did not get a single cent of pension. This was because they were sent home from work by the government because they got married. That’s how it was – if you were a nurse or a teacher you were sent home because you were married, the woman was not considered the breadwinner so she did not deserve to work with the government back then.

Worse still, they were not paid any pension. Two years ago I gave €100 to those who worked up to five years and €200 from five to eight years because they did not get the minimum pension. Now they are retired and you cannot ask them to pay NI contributions retroactively, so we compensated for them. This year we gave them another €50.

These injustices affected a lot of people and it was a principle of justice rather than of the money itself.

What is your reaction to criticism by the working age middle class that the 2017 budget does not serve them?

People saying this must not have read the budget. First of all, for all the business people who have a company with property in it, the biggest headache was giving it to their children. They found it very unjust that the duty is at five per cent and they have quite a high value asset. So we gave them a one year reprieve from five percent to 1.5 per cent. If that isn’t a gift or a chance to address the middle class, I don’t know what is. They can do it in that year for the future rather than leaving a will; they can do it now and still be in control.

The second one regards dividends. Who are the people who have shares on the stock exchange? I am not saying they are necessarily very rich but they are people with money. We are refunding the withholding tax if they were in the 25 per cent bracket when it fell from 35 per cent to 25 per cent. Again, those who benefit from those €42 million spread over three years in the income tax cut are going to benefit from this dividends issue.

All tax players who are 62 and over - whether middle, upper middle, whatever - will get close to a €600 tax cut in two years from their pension income.

Malta is an ageing population like the rest of the developed world. Is there a concern over the sustainability of our pension system?

When we talk about sustainability we are speaking about the future, and not of today.

In other words, we realise that we made mistakes in the past because we weren’t sophisticated enough to have looked into the future with models. In fact in 1979 the pension scheme was very generous and over time it effectively diminished.

We are not going to make that mistake again and we are looking at sustainability. The first reform was when they changed the retirement age from 61 to 65, but it was prolonged to 2027.

People will have to adjust to the fact that at 64 they will still be working and that they will not retire at 61. This year we revised the model, and we looked, with the European Commission, to the future.

Productivity, participation of women, labour force, demographic growth, and economic growth are all parameters within the model. We also worked with the World Bank on this model to ensure that we are doing the methodology correctly. A working group got together, we had this model and recommendations were made.

Now every five years government is obliged to go to Parliament and inform them of the position on sustainability. There are risks but with the reforms we have done we have increased one year NI payments and we make sure that anybody, up to 2060, can rest assured they will have a pension.

They won’t go bankrupt or be cast into poverty.

Secondly, we introduced the second pillar that we have been speaking about for a while.

Now, it’s not a big deal because interest rates are low. However, those who are buying private insurance from an insurance company or from any other financial institution will get a tax break.

In other words, we can double that €1,000 per person which they put in next year. This year we had other concerns to make it more attractive, that’s the third pillar which will supplement your first pillar.

The business community is dead against the second pillar because they say it makes them less competitive. We can take that with a pinch of salt. It is a tax when the participation rate (of the second pillar) in Malta, no matter how much it has improved over the last three years, is still lagging behind the rest of Europe. When we reach the 2020 target of having an over 70 per cent participation like many modern countries, then you can ask them to start saving by forcing them both the employer and employee, to save so to speak, but just not now. You can still enter the pillar voluntarily. So for this year we are not calling it a second pillar as such, because it’s not forced.

Any employer in any company that wants to introduce an occupational private pension, and where the employer contributes as much as the employee, would get a tax cut of 150 per cent of his contribution. These are like pilot projects, you hear that a company introduced it, and then the unions notice it. Once it starts being accepted, we will come to a time in the future where government can legislate and implement it across the whole economy. We believe that until we reach that participation rate, we will continue to have it on a voluntary basis.

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Government has no more, but not where PN Deputy Leader MARIO DE MARCO told Kevin Schembri Orland in an interview that government has no problem with spending, however it does not spend where it actually matters. Revenue is rising, he said, but so is recurrent expenditure. Dr de Marco was asked for his opinions on the budget, alternatives which he would have implemented, and the lack of measures aimed at the middleclass.

What did you think of the budget?

The budget tries to address a social deficit which was being felt and highlighted by members of civil society. Notwithstanding economic growth, the effects were not being felt by pensioners and low income earners. The reality is that there are more than 90,000 people in Malta living in a state of poverty or ho are at risk of poverty.

The budget tries to go some way to try and put more disposable income in the pockets of pensioners and those on the minimum wage.

In our opinion however, it does not go far enough to address these needs.

The budget totally ignores various other challenges this country faces or could face in the near future. In our pre-budget document, we outline a number of challenges we feel the country needs to address.

Our financial services industry is under threat due to talks about tax harmonisation and the future of our full imputation system which is the cornerstone to the success of our financial services sector. While the importance of maintaining our competitive fiscal advantage is mentioned in the budget document, nothing of substance is mentioned as to whether government

has a plan b and what the government is really doing to maintain the status quo.

The level of exportation today is still lower than it was in 2012. Our industrial production has been constantly low, and that reflects that our factories are not producing and exporting enough. We need to see what we can do to make this industry more competitive. The GRTU, Chamber of Commerce and the PN said that we need to lower energy rates for industry. The 25% energy reduction following the last election is still not attractive enough.

The reduction was not made due to the promised second power station, which is still not up and running, but was effectively made due to increased efficiency of the BWSC power station which was sold off, the interconnector which enabled government to import more than 70% of our energy needs at attractive prices, and the reduction in oil prices.

There are challenges faced by the retail sectors. Not all retail outlets are doing well and we have a number of commercial centres in areas like Qormi and Hamrun facing challenges. In our pre-budget document we said that we need to help these areas reinvest and reinvent themselves. All these chal-

lenges are not addressed in the budget document.

We are satisfied with record tourism numbers, but ultimately this success is based on three cornerstones – the product, accessibility and marketing. We regret to note that capital expenditure in this sector has not been increased and there is no real investment in

our tourism product. Looking at major projects, Fort St Elmo, Fort St Angelo etc, these all started through EU funds in the last period during the previous administration. I am not seeing any investment in the tourism product.

Air Malta brings in some 45% of our tourists and the future of the airline is still in question. All we know to date is that there are ongoing talks with Alitalia, which is losing half a million euros a day.

The legitimate question is whether Alitalia is the right strategic partner to save Air Malta. Is government considering a plan b? Why are the stakeholders not being consulted on this matter?

Our concern is that there is very little vision. Economic success is not solely based on doing what one has done better, you also need to look at new economic niches.

The economy of today is not the same as it was 10 years ago. A lot of success seen in previous administration was not based solely on strengthening already existing pillars, but by creating new ones such as aircraft maintenance, the maritime sector, iGaming and the financial services sector. What are the new economic activities for tomorrow? What is government’s vision in this regard?

We have spoken about the maritime and logistics hubs, the creative industry, and in reality there is very little about all this other than what may have been repeated from the previous year.

Economy Minister Chris Cardona launched a request for proposals on a logistics hub a few weeks ago, fine, but we were talking about this in the last budget.

Then there are the financial challenges in this country. Government tried to savour the fact that the deficit is going down, but ignores the increasing current ex-

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The Malta Independent on Sunday | 23 October 2016

o problem spending e it matters

“ ”

We are satisfied with record tourism numbers, but ultimately this success is based on three cornerstones – the product, accessibility and marketing

penditure.

Isn’t the deficit and debt expected to go down?

It is, but the problem is that while revenue is rising, recurrent expenditure is also rising. Our recurrent expenditure rose more than what was budgeted, and the only way government succeeded in keeping the deficit level as they did this year, was by reducing capital expenditure.

Recurrent expenditure in the first seven months of this year was some €45 million above what was budgeted. Our capital expenditure was €12 million less than budgeted. Government recurrent expenditure projected for 2017, when compared with 2013, has spiralled up by some 30%, which in absolute figures, amounts to hundreds of millions. Government has no qualms about spending more, but not where it necessarily makes sense to spend. Capital expenditure is the investment used to improve infrastructure and our product.

Couldn’t the decrease in capital expenditure be due to government opting for more public-private partnerships?

No. They knew they were going for PPPs. The partnerships we are saying are in, for example, St Luke’s. The reality is that there is very little mention of infrastructure projects other than the Kappara junction. What is government seriously doing to address the traffic problem? What have we heard about the traffic issue beyond giving persons turning 18 the right to use public transport for free? Beyond this we haven’t heard any major solutions and this is of concern, as the traffic problem is not simply a problem for commuters,

or a matter of frustration, but it is also a problem for our industry, for retailers, delivery vans and our attractiveness as a tourist destination. When tourists come to Malta they are coming to an island and the last thing you identify an island with is gridlock traffic.

The government did come out with other proposals, such as incentives for employers to provide free transport for employees. In your opinion, what more should have been done?

Last year we highlighted the issue of school transport, and we need to incentivise parents to utilise school transportation. We know that when school starts there is more traffic on roads. We also need to think about infrastructural projects and car pooling initiatives.

Yes while it is good to incentivise companies, it is not enough. It is not an issue that can be tackled from one day to the next, but at least we need to start planning and all this is absolutely lacking in the budget.

Which measures did you find positive, and did you find any that would have a negative effect?

One proposal which we also put forward was to exempt pensioners from tax. If we want to ensure pensioners have an adequate pensions without revising the pension is by making it tax free, thus giving more income into the hands of pensioners. That proposal has been taken on-board although it’s been limited to €13,000. It is quite high but if you are a couple with €13,000 you still don’t get enough.

There is also the issue that it is being staggered over two years when the problems are immediate.

There is also a proposal on dividends being paid in the case of shares in listed companies. They will be paid back. This was also one of our proposals and, as we know, elderly persons try to invest their money to receive an income and this is a good way to help these people.

The transfer of business from one generation to the next will be taxed less, which is also a good initiative.

In terms of issues which are negative, I would say there are two.

The first is excise duty on toiletries, shampoos etc. It will replace the eco contribution but we still need to see whether more will be paid at the end of the day or not.

The second is the failure of the budget to reduce energy for industry and fuel prices. Everyone assumed that as the new power station is to kick off within a few months, government would finally be in a position to implement its pre-election energy plan. In the election run-up, the Labour Party’s

plan was not to reduce tariffs due to the BWSC, the interconnector or fuel price drops, but, rather, as a result of the new power station which they promised to deliver within two years.

They had said clearly that in the first year they will finance the cost reduction with the €30 million they said the selected consortium would have paid, and that they would have financed the subsequent cost through the savings which the new power station was meant to have provided for. None of this took place in the first three years and as we are approaching the fourth year, it may very well be that the new station would be up and running, meaning that this would be the time for government to implement its promise. What they did before had nothing to do with the new station but had everything to do with investments of the previous administration and lower fuel prices.

Government never said it would decrease energy tariffs in this budget. If I am correct this was originally suggested by Dr Busuttil...

No that was suggested by the GRTU first, then by the Chamber of Commerce and the Malta Employers Association. There was a logical reason for the PN taking it on-board. If you truly want to make the Maltese industry competitive, given the two-thirds reduction in fuel price and that the interconnector is offering us low prices, that the BWSC has been proven to be efficient, and that the government saw so much potential in the second power station, what will come in as a result of it.

We suspect government may have tied its hands with Electrogas as to the prices at which it would buy energy and how much it would buy. We know this is for an 18-year period. The most important thing in commerce is flexibility and our question is, does government have the flexibility to buy energy from the cheapest source or not?

If government can buy energy through the interconnector at a cheaper rate than what is offered

by Electrogas, will government be in a position to do so or is government committed to buy energy from Electrogas even if there is a cheaper alternative source? If that is the situation, then effectively government has lost its flexibility of buying energy from the cheapest possible source.

Ultimately it should be a consumers’ world.

International oil prices have started going up again, and the PN’s idea is to buy fuel on a day-to-day basis. But

government’s argument is that by doing what it is doing, is allowing businesses to plan ahead...

Businesses themselves want flexibility. The GRTU represent business and they disagree with government’s argument, and I think you need to listen to sources that understand business. If the Chamber of Commerce is saying that they want flexibility, we should listen to them as they know how to run businesses.

Do you agree with the assessment that not much was done for the middleclass?

I think the word middleclass was absent from the budget. This was meant to be a government that prided itself in addressing the needs of the middleclass and aspiring to create a new middleclass.

In reality while we saw reduction in taxation levels in previous budgets, these were only the implementation of budget measures that started taking place under the previous administration.

I think that if a secretary, a teacher, a nurse or a professional were to look at this budget and say ‘what is in it for me’, the answer would be that there is nothing in this budget that addresses their needs.

In your opinion what should have been included for the middleclass?

If you look at their issues, they want to see more measures related to education, more measures related to health. I think they would have liked more measures relating discussions to the second pillar pension. Discussion on the second pillar is completely absent.

They would like to see more issues relating to small businesses, and transportation. There is very little mention of bureaucracy matters when this is something that small businesses face.

The main problem with the budget is the lack of vision and the lack of addressing the real challenges, such as those of the selfemployed. In this country the economy is driven by SMEs, and what is in the budget for these people?

It was said that Malta will reach the halfway mark for its renewable energy 2020 targets. Do you think enough was in the budget to help push through to this target and do you believe Malta can achieve the target?

I hope we do achieve it. So far we are heavily investing in solar energy and we are seeing the first plans of solar farms. Admittedly, issues with solar farms in Malta

surround a delicate balance due to the smallness of our size. We also know that part of the countryside is Natura 2000 areas, and what would the impact of such solar farms be. We need to incentivise more factories to utilise their flat roofs. There are many industrial parks where I think we could do much more to utilise space and climate.

The PN criticised the fact that there was no mention of the new power plant in the budget, yet this is a private project. What did the PN expect to be said?

While it’s a private project, it is the result of a government call through an expression of interest.

It is really a government project being carried out by a private consortium, which has a public impact. Given that the famous LNG tanker arrived literally a week before budget day, we would have expected issues concerning the IPPC, the risk assessment etc to have been mentioned and addressed.

Within the energy section I would have expected it to be mentioned given government made it the cornerstone of its election campaign.

What did you make of the proposals for Gozo, including the fast ferry service?

I think government’s proposals for Gozo need to be taken with a pinch of salt. Last year they promised a yacht marina, a cruise liner terminal and others. We now have this fast ferry proposal which we also mentioned in our pre-budget document. It needs to be implemented since commuting between the islands is a problem.

In terms of the tunnel study, what has this government said? It first launched the idea of a bridge which was basically a non-starter and we wasted two years discussing it. Finally it realised that a bridge is nonsensical. Now we’ve gone back to the drawing board and are talking about a tunnel. A tunnel will address the needs of commuters, but we need to study the implications further.

I think the biggest tongue in cheek statement regards the study on the devolution of powers to Gozo. This administration reduced the powers for the Minister for Gozo, rendering him, to a large degree, a mere head of department, with transport, education and health out of his hands. What was left in the hands of the Ministry for Gozo which is not already in the hands of local councils? We are all for devolving more powers for Gozo and we have always believed that it should have more powers allocated to it.

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The Malta Independent on Sunday | 23 October 2016