Pre-budget documents should be a realistic assessment of what needs to be done in the year ahead to balance the public finance books, encourage economic growth and deal with the various challenges facing the country. When such a document precedes an election, the narrative can often be less objective than it should.
The minister of finance has declared that next year’s budget will focus on the environment and on “liveability”, sensible spending and quality growth and prioritise the push against tax evasion. The realities in the country could be seen as a gauge for the reliability of this statement.
The pandemic hit Malta worse than it did most other EU countries. Its impact on the country’s economic activities was understandably worsened by the big share of tourism in the country’s GDP.
The government should not be blamed for incurring a deficit of €1.6 billion to save jobs and keep COVID-affected businesses afloat.
However, once this massive rescue operation starts to be wound down, some negative consequences can be expected. Some businesses that were only marginally solvent before the pandemic may not manage to survive the shock of the withdrawal of government support.
On another front, the country’s challenge of attracting new investment will only become harder as a result of its greylisting by the FATF. Some companies have already transferred their operations to other jurisdictions. More might do so and potential new investors may be rethinking their plans to invest in Malta.
For these reasons alone, Finance Minister Clyde Caruana should be more prudent: his commitment to keeping taxes at the same level in 2022 and making up for revenue shortfalls by cutting down on tax evasion may come back to haunt him. Indeed, it is hardly uncommon for governments to go back on their pre-budget promises by arguing that new developments – surprise, surprise – justify a more rigid approach to public finances.
The declaration of war on tax evasion is not new. In the last few decades, every administration has expressed pious intentions to promote a higher standard of tax morality. These aspirations often end up being little more than public relations stunts.
The tax authorities’ tolerance of the political parties’ failure to honour their tax obligations will only encourage more abuse of the taxation system. Malta already has one of the highest levels of shadow economic activities in Europe – at an estimated 26 per cent of GDP, its shadow economy is even more significant than those of Greece or Italy.
Meanwhile, the failure to prosecute those holding secret accounts in Panama may be due to legal complexities but it certainly does not add much credibility to the statement that this administration will curb tax evasion more successfully than in the past.
The economic indicators highlighted in the pre-budget document are impressive. Employment growth of 2.2 per cent, unemployment of 4.3 per cent, inflation of 1.3 per cent and GDP expected to surpass the 2019 levels. All are fine targets. One can only hope they will not be achieved at the cost of further environmental degradation, continued importation of low-skilled labour from low-cost countries and further deterioration in fiscal indicators.
The main obstacles in the government’s path to achieving its aspirations include prolongation of the COVID impact on the economy and failure to curb tax evasion to the extent that the minister is targeting.
It is good to hope for the best. It is even better to have prudent expectations in case the challenges ahead prove more daunting than depicted.