The four main ar­eas of poverty and how each bud­get has tack­led them

Fi­nance Min­is­ter ED­WARD SCI­CLUNA meets with He­lena Grech in or­der to fill us in on what the govern­ment’s term plan is and how this bud­get fits into the grander scheme of things. Pro­fes­sor Sci­cluna di­vulged the sys­tem­atic ap­proach taken by this gov­ern­men

Malta Independent - - BUD­GET 2017 -

Some crit­i­cised the bud­get for lack­ing vi­sion. How does the 2017 Bud­get fit into the govern­ment’s long-term plan?

Even be­fore the bud­get we had a plan. I was part of a team and we costed ev­ery mea­sure over time, as­cer­tain­ing whether the coun­try could af­ford it. Now we are just im­ple­ment­ing the plan. For the very first bud­get, that is the previous govern­ment’s bud­get, our plan was to ac­cept it. It was a bold de­ci­sion. The rea­son we did that was be­cause cer­tain prom­ises were made to the pub­lic and they had to be hon­oured. For the sake of con­ti­nu­ity and sta­bil­ity, cir­cum­stances de­manded that we get on with busi­ness; it was al­ready March/April. The bud­get takes a year so if we were re­ally go­ing to be se­ri­ous about our own bud­get, we had to stick with the plan.

For our first bud­get, we con­cen­trated on bring­ing peo­ple into the work­force, and mak­ing work pay. So we had the first time buyer mea­sure, and then the whole gamut of tax mea­sures on women be­cause that was a hid­den re­source for Malta. We wanted to get them out into the work­force and re­move the ob­sta­cles. We did this through the free child care cen­tre mea­sures and var­i­ous oth­ers. We had this plan of mak­ing work pay. We used to speak about long-term un­em­ploy­ment, but it was for noth­ing if it paid peo­ple to stay at home and re­main on ben­e­fits. Why would they lose all the ben­e­fits and get less pay? Thank you very much I’ll stay at home. They were ra­tio­nal.

The sec­ond year was to take peo­ple away from de­pen­den­cies, so to speak. We re­moved the de­pen­dency as much as pos­si­ble by strik­ing a deal. We said you can keep 2/3 of the ben­e­fits if you find work. The Em­ploy­ers as­so­ci­a­tion were against it be­cause they said it does not make sense to have two work­ers do­ing the ex­act same job, where one is earn­ing min­i­mum wage and the other is earn­ing min­i­mum wage plus ben­e­fits. Sorry, that (pay­ing ben­e­fits) was an ex­pense al­ready so we man­aged to get the per­son into the work force and proud of work­ing.

So first was mak­ing work pay, and we man­aged. Then we pro­moted work rather than de­pen­dency, and then we also ad­dressed the prob­lem of pre­car­i­ous work and min­i­mum wage work. It was es­tab­lished that yes the min­i­mum wage is not much and it’s not enough. That is a mar­ket de­ci­sion be­cause that min­i­mum wage is re­flect­ing the per­son’s pro­duc­tiv­ity in that par­tic­u­lar sec­tor. The norm is peo­ple hav­ing bet­ter and bet­ter wages but work­ers in the de­clin­ing in­dus­tries get re­main with the min­i­mum wage.

So we had to sup­ple­ment it with the in work ben­e­fit. The in work ben­e­fit was tuned to get the part­ner to work and if they (a cou­ple) both man­aged to work they would get €1,000 per child. This year, we went fur­ther and ad­dressed even those women who can’t work, and we will give them €150 per child.

So you man­aged to bring peo­ple into the work­force and re­duce de­pen­dency. What hap­pens next? The Op­po­si­tion made slammed this govern­ment heav­ily for not look­ing af­ter the poor.

Look­ing back with hind­sight, be­fore we came to this bud­get we asked our­selves what we have ob­tain so far. We re­alised that poverty could come from four sources. For starters, these are a lack of work and very of­ten a lack of ed­u­ca­tion.

By mak­ing peo­ple work and get­ting them into the labour force we are help­ing the poor. I mean those who are al­ready work­ing are do­ing rel­a­tively well. Those who were not do­ing well be­cause they were un­em­ployed - the sin­gle par­ents, the un­em­ployed, those on so­cial ben­e­fits, the 3,230 who came into the work­force and off ben­e­fits - we helped them while cre­at­ing work and get­ting the econ­omy to cre­ate the wealth we needed. We did the stud­ies and the ef­fect of ta­per­ing an in work ben­e­fit is that it hits the poorer and more vul­ner­a­ble peo­ple.

The sec­ond area is the work­ing poor, which we are ad­dress­ing with in work ben­e­fits. With that scheme you are bet­ter off be­cause you are on min­i­mum wage plus you have the added bonus from the in work ben­e­fits.

The third rea­son for poverty is re­tire­ment. Why? Be­cause from a full work­ing life with over­time and so on, bang that stops and you are on a pen­sion, and this is not ad­e­quate com­pared to your previous life­style. You re­ally have to have a lot of as­sets so to speak to com­pen­sate for that lack of in­come. But the thing is that you had those as­sets be­fore plus you had your work, which means that what­ever the case you need to live off less.

The fourth rea­son is the whole gamut of so­cial prob­lems - dis­abil­ity, sick­ness and all the vul­ner­a­ble peo­ple who have to rely on so­cial ben­e­fits. In our govern­ment’s three bud­gets we tried to ad­dress the first two. Last year, for this year, we ad­dressed the pen­sions, we had a bud­get and there were so many ideas in­clud­ing those of the pen­sions work­ing group, but we didn’t adopt those.

They said start from the 75 but I said look, let’s raise the floor and make sure no­body would be be­low that. We en­sured that no­body in Malta on a pen­sion was re­ceiv­ing less than 140 a week. For those who were mar­ried we gave an ex­tra four eu­ros per week for the part­ner not earn­ing a pen­sion, but then we sup­ple­mented that.

This year was not a ques­tion of now be­ing the time to start sprin­kling ben­e­fits every­where sim­ply be­cause wealth is be­ing cre­ated. We said we are go­ing to ad­dress the third group – the re­tirees and the peo­ple on so­cial ben­e­fits. They were only pe­riph­er­ally touched be­cause even for the mid­dle class, we had al­ready raised the ceil­ing and re­moved some in­come tax. This year we went with a big­ger bang on pen­sions. In fact, we have a packet of 20 mea­sures di­rectly af­fect­ing pen­sions.

Plus there are oth­ers that will also af­fect pen­sion­ers in­di­rectly. For ex­am­ple if we spent mil­lions on cancer pills, that ex­pen­di­ture would also af­fect them.

We then fo­cused on so­cial as­sis­tance be­cause ev­ery time you cut tax­a­tion you are only hit­ting those who pay tax. What about the oth­ers? Some coun­tries have a neg­a­tive in­come tax whereby the govern­ment starts writ­ing cheques to com­pen­sate for lower earn­ings. We have a sys­tem of so­cial as­sis­tance but we are not pre­pared in Malta to have a very fair in­come tax. We have a patch­work sys­tem of so­cial as­sis­tance for dif­fer­ent cir­cum­stances. The hard­est job was to fig­ure out how they over­lap and to en­sure that no­body is missed and is al­lowed to slip through the loops.

With in­come tax re­duc­tions we are not af­fect­ing the poor, with the in­come tax re­duc­tions we are af­fect­ing ev­ery pen­sioner in Malta in­clud­ing those in the mid­dle, up­per, lower you name it – any­body who pays tax.

We are rais­ing the ceil­ing from the norm of €9,100 for sin­gle peo­ple and €12,700 for mar­ried cou­ples, which is the ac­cepted and that’s what we have. In two years we are rais­ing it from €9,100 to €13,000 which is nearly €4,000 and in two years, and that puts €585 in one’s pocket. For those who are mar­ried we have a dif­fer­en­tial, so even though the wife does not have a pen­sion we gave €1,000 tax-free, from €13,000 to €14,000. So that €1,000 ex­tra is not taxed no mat­ter where it comes from, and it is not tied to a pen­sion. The source of a pen­sion could be any­thing – con­trib­u­tory, non­con­trib­u­tory, trea­sury, for­eign you name it.

This bud­get seeks to ad­dress in­jus­tices from the past, through an €8 mil­lion fund. Can you tell me more about this?

We have a pack­age of €24 mil­lion and added €8 mil­lion to that, which will hope­fully start to ad­dress so many anom­alies that were cre­ated by the change in the pen­sion sys­tem.

First of all, they can­not all be ad­dressed by the bud­get and they can also take years to ad­dress. Also, ac­cord­ing to Euro­stat, we couldn’t even ac­cept the claim on the books. If we were to do so, it would be ours and the deficit would shoot up. So what we did in an in­tel­li­gent way was we cre­ated a fund , we put €8 mil­lion in for the next year, and next time it could be €6 mil­lion or €10 mil­lion de­pend­ing on how much the govern­ment can af­ford. These groups will be ad­dressed ac­cord­ingly.

We have mapped cer­tain in­jus­tices, and some of them are so small but they hurt so much. One of them was the means test – it was very cruel. It was un­fair that two per­sons in dif­fer­ent house­holds have the same in­come, and one cheats whereas the other is hon­est. Both of them have, say, €10,000. One of them cheats and hides it un­der the mat­tress, while the other is hon­est and puts it in the bank. When govern­ment checks to make sure that a per­son meets the cri­te­ria for, for ex­am­ple, the pink slip, we see that this per­son goes be­yond the thresh­old and that per­son gets taken off the pink slip list.

Now it is the in­come rather than the as­sets that is be­ing re­viewed. Many of these peo­ple in­her­ited, for ex­am­ple, one­tenth of a house in Bormla and it would be un­fair for that per­son to not meet the means test thresh­old and for what - what is he go­ing to get for that as­set?

This is also the case for the rent sub­sidy. It is no se­cret that rents have gone up. There are 1,500 peo­ple at present get­ting a sub­sidy. Over time we cal­cu­lated a 70-80 per cent in­crease from the last change. We also dou­bled the num­ber of ben­e­fi­cia­ries from 1,500 to 3,000 by widen­ing the means test thresh­old. So the Hous­ing Author­ity will widen the means test in such a way so that an­other 1,500 will be added.

There was also a group of 12,000 per­sons, most of them women, who, and it was so un­fair, paid two or three years of Na­tional In­sur­ance con­tri­bu­tions but did not get a sin­gle cent of pen­sion. This was be­cause they were sent home from work by the govern­ment be­cause they got mar­ried. That’s how it was – if you were a nurse or a teacher you were sent home be­cause you were mar­ried, the woman was not con­sid­ered the bread­win­ner so she did not de­serve to work with the govern­ment back then.

Worse still, they were not paid any pen­sion. Two years ago I gave €100 to those who worked up to five years and €200 from five to eight years be­cause they did not get the min­i­mum pen­sion. Now they are re­tired and you can­not ask them to pay NI con­tri­bu­tions retroac­tively, so we com­pen­sated for them. This year we gave them an­other €50. These in­jus­tices af­fected a lot of peo­ple and it was a prin­ci­ple of jus­tice rather than of the money it­self.

What is your re­ac­tion to crit­i­cism by the work­ing age mid­dle class that the 2017 bud­get does not serve them?

Peo­ple say­ing this must not have read the bud­get. First of all, for all the busi­ness peo­ple who have a com­pany with prop­erty in it, the big­gest headache was giv­ing it to their chil­dren. They found it very un­just that the duty is at five per cent and they have quite a high value as­set. So we gave them a one year re­prieve from five per­cent to 1.5 per cent. If that isn’t a gift or a chance to ad­dress the mid­dle class, I don’t know what is. They can do it in that year for the fu­ture rather than leav­ing a will; they can do it now and still be in con­trol.

The sec­ond one re­gards div­i­dends. Who are the peo­ple who have shares on the stock ex­change? I am not say­ing they are nec­es­sar­ily very rich but they are peo­ple with money. We are re­fund­ing the with­hold­ing tax if they were in the 25 per cent bracket when it fell from 35 per cent to 25 per cent. Again, those who ben­e­fit from those €42 mil­lion spread over three years in the in­come tax cut are go­ing to ben­e­fit from this div­i­dends is­sue.

All tax play­ers who are 62 and over - whether mid­dle, up­per mid­dle, what­ever - will get close to a €600 tax cut in two years from their pen­sion in­come.

Malta is an age­ing pop­u­la­tion like the rest of the de­vel­oped world. Is there a con­cern over the sus­tain­abil­ity of our pen­sion sys­tem?

When we talk about sus­tain­abil­ity we are speak­ing about the fu­ture, and not of to­day.

In other words, we re­alise that we made mis­takes in the past be­cause we weren’t so­phis­ti­cated enough to have looked into the fu­ture with mod­els. In fact in 1979 the pen­sion scheme was very gen­er­ous and over time it ef­fec­tively di­min­ished. We are not go­ing to make that mis­take again and we are look­ing at sus­tain­abil­ity. The first re­form was when they changed the re­tire­ment age from 61 to 65, but it was pro­longed to 2027. Peo­ple will have to ad­just to the fact that at 64 they will still be work­ing and that they will not re­tire at 61. This year we re­vised the model, and we looked, with the Euro­pean Com­mis­sion, to the fu­ture.

Pro­duc­tiv­ity, par­tic­i­pa­tion of women, labour force, de­mo­graphic growth, and eco­nomic growth are all pa­ram­e­ters within the model. We also worked with the World Bank on this model to en­sure that we are do­ing the method­ol­ogy cor­rectly. A work­ing group got to­gether, we had this model and rec­om­men­da­tions were made. Now ev­ery five years govern­ment is obliged to go to Par­lia­ment and in­form them of the po­si­tion on sus­tain­abil­ity. There are risks but with the re­forms we have done we have in­creased one year NI pay­ments and we make sure that any­body, up to 2060, can rest as­sured they will have a pen­sion. They won’t go bank­rupt or be cast into poverty.

Se­condly, we in­tro­duced the sec­ond pil­lar that we have been speak­ing about for a while. Now, it’s not a big deal be­cause in­ter­est rates are low. How­ever, those who are buy­ing pri­vate in­sur­ance from an in­sur­ance com­pany or from any other fi­nan­cial in­sti­tu­tion will get a tax break. In other words, we can dou­ble that €1,000 per per­son which they put in next year. This year we had other con­cerns to make it more at­trac­tive, that’s the third pil­lar which will sup­ple­ment your first pil­lar.

The busi­ness com­mu­nity is dead against the sec­ond pil­lar be­cause they say it makes them less com­pet­i­tive. We can take that with a pinch of salt. It is a tax when the par­tic­i­pa­tion rate (of the sec­ond pil­lar) in Malta, no mat­ter how much it has im­proved over the last three years, is still lag­ging be­hind the rest of Europe. When we reach the 2020 tar­get of hav­ing an over 70 per cent par­tic­i­pa­tion like many mod­ern coun­tries, then you can ask them to start sav­ing by forc­ing them both the em­ployer and em­ployee, to save so to speak, but just not now. You can still en­ter the pil­lar vol­un­tar­ily. So for this year we are not call­ing it a sec­ond pil­lar as such, be­cause it’s not forced.

Any em­ployer in any com­pany that wants to in­tro­duce an oc­cu­pa­tional pri­vate pen­sion, and where the em­ployer con­trib­utes as much as the em­ployee, would get a tax cut of 150 per cent of his con­tri­bu­tion. These are like pilot projects, you hear that a com­pany in­tro­duced it, and then the unions no­tice it. Once it starts be­ing ac­cepted, we will come to a time in the fu­ture where govern­ment can leg­is­late and im­ple­ment it across the whole econ­omy. We be­lieve that un­til we reach that par­tic­i­pa­tion rate, we will con­tinue to have it on a vol­un­tary ba­sis.

We used to speak about long-term un­em­ploy­ment, but it was for noth­ing if it paid peo­ple to stay at home and re­main on ben­e­fits. Why would they lose all the ben­e­fits and get less pay?

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