Political economy

After a summer of nothingness defended by the government with claims that it was burning midnight oil away from media glare, we have been presented with yet another anti-climax.

If this is what the government can come up with after engaging all the genius of the natural party of government we really are in a bad way. After passing around the hat for ideas through a long hot summer, the government comes up with a more revenue budget that is unimaginative to say the least.

Hiking VAT to 18 per cent in a three percentage point leap across the board is not a fine tuning of the economy. It is a swipe at private funds by a government that is beginning to look like it is losing the plot.

Since the introduction of VAT in 1995, Alternattiva Demokratika has been harking for its use as a tool. We carefully shunned the temptation to exploit the discomfort in the introduction of a new form of taxation. We were not populist. We pointed out the need for a smoother introduction of the system. We wanted VAT to have rates stepped down from highs on luxury goods, lows on useful and eco-friendly products to zero on necessities. It was too elaborate for our government. Too bad for social justice.

The result was the Nationalist Party losing the 1996 election, the suspension of Malta's EU application, the loss of EU pre-accession funds and the change of our tax system three times in three years. The Malta Labour Party will forever bear the blame for crippling the economy through years of uncertainty, the same for its PN for its arrogant ham-handedness.

They are still not listening. While the present EU members renew their experiment of stepped rate VAT, Malta goes off in the opposite direction with an across-the-board hike.

It will be as great a shock to the economy as all the tax changes of recent years have been. Low and middle income earners already at their wits' end will be reworking their private economies to make do with less and less. For convinced neo-liberals it is the law of nature: as businesses crumple from lack of custom they are dismissed as collateral damage. The question is how much more of it can we take?

My favourite economist is J. K. Galbraith who, in a recent interview, exposed the illusion of government omniscience and governments' ability to run the economic engine rooms. Governments need to convince us that they know what they are doing and can actually manipulate the economy. It is an illusion and it scares the hell out of me every time some paternalistic finance minister pumps it up some more.

The government has taken a gamble by hiking VAT. Nobody knows whether it will work or not. If it backfires, it will make a bad situation horrendous. A shrinking economy means less revenue for the government, more public debt, more interest payments to make. If it goes that way what will the government do then? Tax us harder still?

What is encouraging about this year's budget is the fact that the government has taken up some of our ideas. It is particularly Green to go for the hypothecation of taxes. The separate accounts in the consolidated fund through which revenue acquired from specific areas is employed in those same areas is a restriction for finance ministers but an acknowledgment of taxpayers.

We have very little control on public finances but, at least, we can have the small satisfaction that a tax we pay is going to support a definite item of government expenditure. Perhaps we will pay the tax a little more gladly.

The same goes for eco-contribution taxes. What it will mean exactly we have yet to find out. It is a Green idea to have eco-taxes. Ideally, they should be designed to direct, encourage or inhibit behaviour to attain a better quality of life for us all. In many instances such taxes could be fully avoidable simply by avoiding the taxed behaviour. In others a full refund could be available once an item is reused or recycled. Unless eco-contribution taxes are used in this way they are abused: the government would have caught onto a new catch phrase to cover its scrounging. Above all, taxpayers should have an alternative, a substitute for eco-unfriendly behaviour. Otherwise the measure is just a tax trap.

I just could not stomach the further taxing of institutionalised pensioners. They are left with Lm600 a year. For those who are completely bedridden or disabled it might not mean much. For those who can still enjoy mobility and the wish to socialise, it is a serious downturn. On Lm50 per month even bus rides, newspapers, a quiet coffee with friends have to be curtailed. The country has made a million liri from the move. We could easily have had a few palm trees, a few flowers less from the Lm2.5 million roundabout embellishment budget to make up for it.

What will really be spectacular is the new inheritance tax. Inherited property will henceforth be subject to capital gains tax on resale. In most cases heirs will hit the 35 per cent mark on selling their inherited properties. The government is joining in most family partitions. The likely result is that heirs will hang onto their properties even longer in the hope of a further hike in prices to make up for the tax bite.

More capital assets will crumble in the wait. Malta will look like a ruin for a while longer. When capital gains tax was introduced to curb speculation it produced just the opposite effect: prices shot up to make up for it. Sales may slow but property hoarding carries on. More people are going to see property prices soar way out of their reach.

What is particularly unfair is that capital gains tax takes no account of inflation particularly in the property sector. In fact, it pushes this inflation, without accounting for it. People who want to swap their property for one of equivalent value are unable to do so. In selling the first they lose out. They can only go to a property of lower value. Unless they can inflate the price to make up for the tax bite they will stay put. In the short-term they will stay put, the government will not rake in more revenue from a stagnant market.

In this budget the government has succeeded in curbing our spending without significantly addressing the more serious problem of its own spending. Perhaps the minister of finance is a politician after all, not a poor number cruncher as he has been accused of being: he invites us to do as he says not as he does.

Dr Vassallo is chairman of Alternattiva Demokratika - The Green Party.

www.alternattiva.org.mt