Surveys among the business community are conducted regularly by the small businesses lobby to help understand the underlying dynamics driving trade in goods and services. The Malta Chamber of Small and Medium Businesses’ latest survey indicates the sombre mood of small businesses in the current challenging economic context.

Unsurprisingly, inflation was the topmost concern amongst the owners of the 300 businesses participating in this survey. When consumers feel that their pockets have been negatively affected by high inflation while their wages remain stagnant, they limit their expenditures.

This is not good news for the large community of retail, importers, distribution and wholesale businesses. Malta’s economic growth is heavily dependent on consumer spending. The creation of economic wealth must be more diversified.  

The Chamber’s headline recommendation is that the government reduce the VAT rate from 18 to 15 per cent on all goods and services to tackle inflation effectively. Chamber chief executive Abigail Mamo argues that lowering the VAT rate would ensure price stability while maintaining revenue.

While it is probable that a reduction in VAT would leave more money in people’s pockets and boost sales and profitability for businesses, one needs to ask how the government can realistically reduce the VAT rate. According to the 2023 VAT Gap in the EU report, Malta and Luxembourg have the lowest VAT rates in the EU.

At the same time, Malta has the second-highest VAT Gap – an estimate of the overall difference between the expected theoretical VAT revenue and the amount collected. A recent IMF report warned that, despite impressive growth, Malta’s physical and public health infrastructures are creaking under rapid population growth. Additional public expenditure for the infrastructure must be funded by taxation or more borrowing when fiscal pressures are increasing fast. 

According to the survey, businesses are also fretting about ‘excessive competition and employee shortages’. The free trade policies of the last few decades have, undoubtedly, helped consumers to have better choices and more competitive pricing. 

Consumer protection authorities and business lobbies must be vigilant to identify and act on suspected market manipulation. Market manipulation could take the form of importers illicitly not paying customs duties because of lax controls at entry points. It could also take the form of price gouging by some businesses in times of a crisis like the current wave of high inflation.

Excessive competition can only be effectively addressed by a shake-up in the market. Only the most efficient operators who do not need taxpayers’ funded subsidies to survive must remain in business. The country has to optimise its economic resources so as not to burden future generations with too much debt. 

Many local businesses have become heavily dependent on cheap imported labour. This may keep costs low in the short term but is not sustainable. More investment in local human capital is needed to reduce dependence on imported labour.  

It is fallacious to believe that the present model is recession-proof. The sombre mood of those in the retail, wholesale, importation and distribution industries is felt in other sectors. The property sector faces a similar downturn, even if their concern rarely makes headlines.

Taxpayers’ money must be spent more judiciously to support the most vulnerable in the community. The rest must get used to managing the painful realities prevailing in today’s geopolitical context. This is the best way not to burden future generations with a huge debt mountain. 

It is time for policymakers to engage in realistic soul-searching to identify where economic policy rationalisation is needed.