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Kurt Sansone
A report on competitiveness to be discussed by the Malta Council for Economic and Social Development, a copy of which is in the hands of MaltaToday, proposes a reduction in the number of public holidays, a lower statutory rate for overtime, the introduction of a property tax, lower income tax rates and a ceiling for wage increases in the public and private sectors.
Kept under wraps, the report was presented to the MCESD Council on 2 August. It was drawn up by the working group set up within the MCESD to come up with measures to bolster competitiveness. The report lists 55 measures backed up by domestic and European statistical data. It could effectively be a blueprint for the November budget.
The report is to provide the basis for a wider discussion on the creation of a social pact. Its principal author was economist Gordon Cordina, who is also the working group’s chairman. The other group members were Victor Scicluna, chairman of the MCESD, Alfred Demarco from the Central Bank, Vince Farrugia from the GRTU, Tony Zarb from the GWU, Adrian Bajada from the FOI, Paul Zahra from the Ministry of Finance and Gejtu Vella from the UHM.
Analysing the contents of the 35-page report it is now clear why on that hot July afternoon when the constituted parties met Prime Minister Lawrence Gonzi at Castille over the introduction of the eco-tax, UHM Secretary General Gejtu Vella, when talking to the press, was visibly emotional about government’s resolve to introduce the tax at all costs.
Having been involved in the drawing up of the MCESD report, Vella knew that any suggestion contained within the report to introduce a form of polluter tax would have to be accompanied by a reduction in income tax. But what Gonzi wanted to do and still intends doing is to simply introduce another revenue generating mechanism with no hint of loosening the tax belt.
The MCESD report does away with the general notion that the country is overtaxed and statistical comparisons with other European countries support this argument. But it does point out that Malta has the fourth highest corporate tax rate at 35 per cent.
According to the report the situation provides an opportunity for economic growth to be stimulated by reducing such rates.
The report suggests a shift in the burden of taxation: “away from productive activities towards non-productive ones; away from the creation of wealth towards the stock of wealth; away from the generation of income towards consumption.”
To encourage investment and economic growth, the report suggests a reduction in corporate and personal income tax rates with a view of making the system “less progressive and hence more conducive to stimulate work effort.”
The loss of revenue from these changes could be replaced by the “imposition of new taxes on the value of assets held for speculative reasons and which represent a non-productive type of investment, especially land.”
A review of the corporate tax contained in the report reveals that lowering the maximum tax rate from 35 per cent to 34 per cent would stimulate GDP growth by 0.2 per cent or an additional economic activity of Lm2.9 million. It would also mean an increase in government revenue of Lm1.5 million.
Reducing the corporate tax rate to 25 per cent would stimulate economic activity to the tune of Lm28.9 million but it would also mean a loss of Lm15.8 million from government coffers.
Furthermore, a reduction of the highest personal income tax rate from 35 per cent to 25 per cent would reduce government revenue by around Lm10 million.
The report suggests lowering the highest income tax rate for companies and individuals and reducing the VAT rate on all tourism related services to five per cent.
To make up for the projected loss of revenue, the report suggests a 25 per cent tax on the “capital appreciation of the vacant property stock,” which would create a revenue of Lm23 million. Workings show that the value of vacant properties is estimated at just under Lm1.15 billion.
Another revenue generating mechanism would be to introduce the polluter-pays-principle, which would not be taxing productivity and wealth creation but consumption.
The report envisages that this re-orientation of government taxation policy would overall produce a neutral effect on government revenue. This means that it would not result in an inflationary demand or contribute to the fiscal deficit.
Public sector and bureaucracy
The report insists that Government should concentrate on rationalizing its operational expenditures particularly on materials and services purchased. It also suggests “phased reductions” in its human resources complement.
The report says in no uncertain words that the “primary and sole target of Government ministries, departments, agencies and other entities within the public sector should be to fulfill solely their function in the most economic and efficient way possible.”
It also speaks of performance targets for the public sector and “where feasible” public sector functions should be delegated to liberalised and competitive private sector operators.
A suggestion is also included for a settlement of dues owed between businesses and government. “An exercise to establish amounts due between government and business should be undertaken with the necessary set-offs being made so as to enhance liquidity in the
economy.
“This would serve as a basis for a one-stop arrangement which would automatically offset amounts due and payable between government and business.”
One of the major bureaucratic bottle necks for business that gets a particular mention in the report is the Malta Environment and Planning Authority. MEPA’s procedures have to be streamlined and a time limit for issuing permits has to be imposed.
The report identifies other bureaucratic measures that require simplification including the issuing and approval of import licenses such as in the case of chemicals and summer half days in government entities, especially those essential to the operations of business.
Women in the labour market
Recognising the importance of an expanded labour market with the participation of more women in productive employment, the report suggests that tax benefits related to part-time employment of a spouse in the case of married tax computation should be extended.
To encourage more part-time work the report advocates the “replacement of the minimum rate of National Insurance contribution with a proportional rate in line with the current system.”
The report dwells on the need to enhance child-care facilities “through the implementation of appropriate regulations and tax concessions to clients.”
Innovation
It goes without saying that the only way wages may increase is if the country attracts industries whose principle remit is research and development, innovation and value added services. To this effect the report talks on the need for government to take a lead in innovation efforts in Malta by developing programmes in areas as marine, bio-medical, information and communications technology, alternative energy and social sciences.
Government should also foster collaboration between local research institutions and business and create an appropriate incentive structure for innovation efforts in Maltese educational and research institutions.
Wages and holidays
After a detailed analysis of the wage increase mechanisms in various countries the report suggests benchmarks for the balance of wages to productivity in various sectors of the economy in comparison to international standards.
The report advocates an agreement on ceilings for wage increases in the private and public sectors for a period of three years to ensure a “maximum level of competitiveness on an international, especially, EU basis.” Such a ceiling is to be enshrined in all collective agreements.
Another controversial suggestion is the reduction of “idle time” or rather public holidays.
The report identifies three ways by which holidays can be reduced: “forfeiting of public holidays falling in a weekend; moving the day of the holiday so as to make a longer continuous period of vacation and; reducing the number of holidays taken.”
Overtime also comes under the microscope with the report advocating an agreement on a “lower statutory rate of overtime premium in cases where overtime work is not undertaken on an irregular basis but is a consistent part of the normal work routine.”
It is also suggested that “normal rates of overtime premium would in the latter case only be paid on an agreed number of hours.”
These measures, sure to create controversy among employees, are mitigated by suggestions to oblige companies to make necessary capital investments and invest in labour retraining programmes and incentive schemes. These would also be enshrined in collective agreements.
Poverty and health
An innovative suggestion is to have a national minimum income level indicating the poverty line, which would be reviewed periodically.
“The poverty line should take into account the expenditure necessary for survival and adjusted according to the number of members in a household, as well as special medical or physical considerations requiring higher expenditure levels. The plethora of social benefits currently existing to prevent poverty should be re-directed so as to ensure that individuals who can prove that their income is below the poverty line would be assisted so as to reach the line,” the report says.
It also argues that the poverty line should not be kept sufficiently low “so as not to discourage work effort.”
On the public health service the report suggests that “the state would continue providing general insurance services and cost-sharing would be introduced solely on the basis of discouraging waste rather than cost-recovery.”
The 55 measures
1. Competitiveness should be the main priority for Government economic policy
2. Implement target ratios for government revenue and expenditure to GDP so as to attain the fiscal deficit objectives
3. Enhance efficiency and effectiveness in revenue collection and re-direct the burden of taxation
4. Re-direct Government expenditure towards growth-enhancing activities
5. Sustain financial, interest rate and exchange rate stability
6. The primary and sole target of Government ministries, departments, agencies and other entities within the public sector should be to fulfill solely their function in the most economic and efficient way possible
7. In the pursuit of their objectives, Government ministries, departments, agencies and other entities within the public sector should ensure expenditure efficiency by setting and achieving performance targets
8. In pursuit of the efficient achievement of their objectives, Government ministries, departments, agencies and other entities within the public sector should identify resource gaps and surpluses, particularly concerning human resources and rectify them
9. The achievement of Measures 7 and 8 require involvement of the entire public sector apparatus which should be driven through appropriate incentive schemes
10. Delegate, where feasible, public sector functions to liberalised and competitive private sector operators
11. A one-stop shop for offsetting amounts due and payable between government and business should be established
12. Instigate exercises to measure the impact on business of existing and new legislation and to suggest avenues for improvement
13. Instigate exercises to assess business-related bureaucratic procedures and suggest ways for their easing and for the cutting of government-induced costs
14. Enhance, efficiency and transparency in the law courts, especially in business proceedings
15. Legislative and bureaucratic procedures are to be streamlined in the environmental sector and Government is to indicate how and when international commitments in this area are to be complied with
16. Introduce a system of benchmarks for the cost, availability and quality, and efficiency of the provision of infrastructural services in Malta compared to the EU
17. Maintain the cost of infrastructural services in Malta to the lowest possible in a scale based on cost structures within the EU and the quality and operational efficiency at the highest levels
18. In the pursuit of measure 17, liberalise and introduce competition in the provision of infrastructural services which are currently monopolistic or protected, where technologically and economically feasible
19. Foster the introduction of innovative financial instruments to finance business, especially small enterprises
20. Further develop business incubation centres and appropriate business working spaces
21. Extend the tax benefits related to part-time employment to spouse in the case of married tax computation
22. Replacement of the minimum rate of National Insurance contribution with a proportional rate in line with the current system
23. Devise a reduction in income tax progressiveness subject to the short-term constraints on the fiscal financial position and remove income tax distortions
24. Enhance child-care facilities through the implementation of appropriate regulations and tax concessions to clients
25. Increase the effective retirement age by means of adequate incentives and the removal of obstacles to continue working in older age
26. Remove abuse on invalidity benefits
27. Make work pay by a review of the amount, duration and conditions of receipt of the unemployment benefit and stricter sanctions in case of fraud
28. Extend programmes aimed at finding work for the unemployed to the inactive
29. Devise appropriate programmes to address the educational and training needs of early school leavers and under-achievers
30. Enhance technical, vocational and entrepreneurial education in Malta, including the certification system, specifically addressed to priority areas of the labour market including women returners
31. Reform the financing of education in Malta in a manner which introduces efficiency and accountability, incentivises study in areas of major economic need and renders the system self-financing with a better potential for export earnings
32. Improve training and retraining of persons who are unemployed or likely to become so in the near future
33. Enhance and extend other preventive and active measures aimed at sustaining and generating employment
34. Government should take a lead in innovation efforts in Malta by developing programmes in areas as marine, bio-medical, information and communications technology, alternative energy and social sciences
35. Devote sufficient resources to Innovation Relay Centre to identify specific needs of Maltese business which can be met through international innovation programmes and help Maltese business to participate in and contribute to such programmes
36. Create an appropriate incentive structure for innovation efforts in Maltese educational and research institutions based on international models of best practice
37. Foster collaboration between local research institutions and business
38. Foster a culture of creative thinking, scientific and mathematically-oriented skills in the early educational system
39. Derive benchmarks for the balance of wages to productivity in various sectors of the economy to compare to international standards
40. Agree on ceilings for wage increases in the private and public sectors for a period of 3 years to ensure the maximum level of competitiveness on an international, especially, EU basis, to be enshrined in collective agreements
41. Implement a reduction in idle time due to holidays
42. Agree on measures to improve productivity in business, including necessary capital investments, labour retraining programmes and incentive schemes, to be enshrined in collective agreements
43. Agree on a lower statutory rate of overtime premium in cases where overtime work is not undertaken on an irregular basis but is a consistent part of the normal work routine. Normal rates of overtime premium would in the latter case only be paid on an agreed number of hours
44. Re-establish the priorities of social policy in Malta with a view of protecting the genuinely most needy, remove the disincentive to work effects of the social security system and enhance financial sustainability
45. Focus on the pension system so as to ensure financial sustainability within the future challenges posed by population ageing and pressures to enhance benefit levels
46. Focus on the public health system action so as to ensure financial sustainability within an environment of increasing demand for higher quality services
47. Fully implement the European Social Charter gradually in line with the growth of Malta’s national competitiveness
48. Set up a focused exercise to ensure that local business makes the best possible use of international trading arrangements and funding available under EU programmes
49. Ensure free and fair trading in Malta, with reliance on the price mechanism in all areas of economic activity to the maximum extent possible
50. Set up a focused and comprehensive exercise to identify market niches which could be profitably exploited in Malta with strong local and regional synergies
51. Target existing firms for re-investment
52. Encourage cluster arrangements between local firms and firms within the Mediterranean region
53. Focus on economic activities which have strong environmental compatibilities
54. Planning authorisations should be given in a rapid, fair and transparent manner
55. Environmental monitoring requirements should impose the least possible burden on business activity
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