Finance Minister says reducing VAT rates would create unsustainable consequences for the economy

Last Updated on Tuesday, 6 February, 2024 at 1:26 pm by Andre Camilleri

Finance Minister Clyde Caruana has warned that reducing the country’s VAT rates could lead to potentially unsustainable ramifications onto the local landscape.

Speaking in Parliament on Monday, Finance Minister Caruana referenced past and recent calls to reduce the local VAT rate of 18%; namely the Association for Catering Establishments (ACE) proposing for catering establishments to pay less than half of this (7%), and more recently from the Chamber of SMEs who recommended that VAT is universally reduced from 18% to 15% as businesses experienced more turnover, yet worse profitability over the calendar year of 2023.

Following the publication of their Business Performance Survey for 2023, a.k.a., SME Barometer, the Chamber also revealed that local businesses are greatly suffering from labour shortages. Respondent businesses within this Barometer placed employee shortages among the two greatest issues impacting their operations today, only second to increases in inflation.

The Minister for Finance argued against the consideration of these suggestions, saying that “the Government is already spending €350 million in [energy] subsidies.” He added that Malta was the only European Union Member State that was doing such a thing.

He addressed the reasoning behind the recommendations to slash VAT rates, though argued that the lessened profitability being experienced by local businesses, and particularly by restaurants, is more due to the oversaturation of the local market.

Caruana provided his interpretation of this situation and described that, in his view, the economy is suffering from diminishing marginal returns. This economic theory holds that the more something is done, the less value per capita it provides in return. Hence, he said that the oversaturation of restaurants has led to their marginal profits lessening year after year as there are now too many restaurants locally for all of them to enjoy the profits they desire and once forecasted.

As such, he continued that with more concessions over and above the energy subsidies, the government would be encouraging even more people/businesses to enter the local economy, resulting in these diminishing marginal returns to be experienced at an even worse degree following further market oversaturation.

“If today there is a loaf of bread between two of us, it gets split in half. Though, if there are 10 of us, the amount of bread that can go round becomes limited,” he said.

The Minister for Finance continued discussing further implications behind this scenario, saying that if businesses continue to expand and grow, Malta’s reliance on importing foreign labourers would likely increase as well, especially due to the country’s brain drain. On this point, he wished to clarify that he is not against promoting economic growth or the businessmen who contribute towards boosting the local economy.

After speaking positively on the foreign workers currently residing in the Maltese islands on the hard work they do, he stated that the increased reliance on foreign labour importation would increase the foreign demographic locally. As a result, he said that this would lead to a naturally higher demand within the local housing/renting sector – leading to increasing prices due to the country’s limited resources.

The Minister thus concluded that the country must find alternative ways to seek economic growth without relying on the increasing reliance to import foreign labour.

“Businessmen in this country, and I say this respectfully, must look beyond their noses and look into the long-term,” Caruana said.

To provide further contexts behind his arguments, Caruana added that the country’s economic situation does not solely rely on what happens in the Maltese islands, but also what happens around us – particularly in the European Union. He described that with the European Union preparing for an eventual enlargement, the Union, as communicated by the European Commission, is looking to better enforce Member States to abide by its (fiscal) guidelines, recommendations, and regulations.

To accentuate that current candidate countries are poorer than the average European Union Member State, Caruana recounted how during a meeting between Finance Ministers within the Council of the European Union, one Eastern European Member State representative, whom he did not identify, told those present that, as a former member of the Soviet Union, their country will not hesitate to seize every opportunity to gain resources since they are comparatively poor and desire significant economic growth.

For instance, he told present parliamentarians that the EU has advised that a Member State’s budget deficit should not exceed 1.5%, down from 3%. The European Commission reportedly spread this communication in order to better ensure fiscal stability during periods of economic downturn. Putting this issue in the Maltese context, he said that Malta must reduce its budget deficit by 0.5% every year in order to reach this target by 2030, which according to him, is a doable task, assuming no external shocks and dedication to reach this target.

Henceforth, Caruana concluded that Malta cannot remain passive in supporting its economic prospects and must seek to be proactive, rather than reactive in addressing this situation.

Once he ended this discussion, Caruana mentioned the agreement that Malta reached with the European Commission on the new national airline that shall soon replace Air Malta. Providing an update, he described that things are looking good for the new airline as seats are already being booked in advance to a positive degree.

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