Pre-Budget document 2021 – towards a sustainable economy

The grape harvest has been poor this year, as little rain poured over our vineyards with the consequence that there is little juice in the grape for the vintner to extract. A similar story can be said of our economic woes.

This year is a tough one for Prof Edward Scicluna who has recently published his pre-budget document for 2020. The advent of COVID pandemic came as a surprise to all. With hindsight, we recall how the first case of COVID-19 was reported on December 31 and the source of the outbreak has been linked to a wet market in Wuhan (Hubei province, China).

Cases of the virus have been spared no countries and infected many territories worldwide. It goes without saying that a steam roller attitude towards a no-deal Brexit could make matters worse, for a Covid-stricken Britain and its relations with EU trading partners.

Since then, human-to-human transmission of the virus has been confirmed with Malta being no exception. It also suffered its first total lockdown for all schools, university, colleges, airports, gyms, bars, restaurants, hotels, English language schools -these faced zero revenue since March. In Malta, we also have our own home grown troubles such as a debt laden national airline. The Opposition say success in previous years was only paper thin and decry that the economy already started to de-accelerate starting from mid-2019.

In the next budget, they expect more investment in waste management, more cleanliness, improving flood water systems by upgrading the frail road infrastructure, address the rising rate of people falling into the poverty trap, and accelerated building of affordable social houses to combat the phenomenon of rent inflation. In their opinion, the 2020 budget can act as the enzyme in the Petri dish acting as a catalyst to facilitate faster reactions among economic agents.

Employers are asking for a reduced vat to 15% and 5% on hospitality and restaurants. It appears that as if by stealth the economy is undergoing another nose dive caused by the second wave of COVID-19 infections which so far has exceeded the number of cases reported in the first lockdown. Many fear austerity is expected during the winter months such as introduction of hidden taxes and tougher sanctions by MFSA and FIAU.

As a quick reaction to this COVID-19, storm the government launched a number of successive aid packages to sooth the pains of economic operators. Quoting from the Pre-Budget document, these policies, range from wage supplements, tax deferrals, quarantine leave, teleworking measures, and liquidity guarantees.

The construction and real estate sector was given life support with a huge reduction in tax due on property purchases under Promise of Sale (POS) as of 9 June 2020 as well as new purchases on the first €400,000.

These concessions will apply to any property contracts finalised between now and 30 April 2021. Previously there was a 5% stamp duty for buyers with the first 20% payable upon signing of the POS, this fee will drop down to 1.5% for the buyer, while the withholding tax for the seller will drop from 8% to 5%. The cause belle was the announcement of a wage supplement which started in beginning of April.

In fact, up to the beginning of July, around 16,612 businesses have benefitted from the wage supplement scheme, covering a total of 79,576 employees. This scheme was beneficial to delay mass redundancies during the lockdown period albeit it created a false picture of the fragile job situation.

The cost was reasonable compared to the savings on unemployment benefits saved and up to July, reached €150.8 million for Annex A and €9.5 million for Annex B. Another novel idea was to help parents staying at home minding their children. These were entitled to a direct payment of €800 per month if working full-time or €500 per month if working part-time. The scheme ran between 9 March and 1 July, costing €10.3 million.

Other innovative measures aimed at reducing business costs included the quarantine leave grant of €350 given to employers or full-time employees who were legally obliged to abide by a quarantine order. A token reduction of electricity charge given to annex A and B and C claimants for 50% of ARMS’s charge capped to a varying rate per company (many expected an across the board reduction in energy tariffs given the severe drop in LNG prices).

Another measure was deferral of some tax payments due in the months of July and August are to be settled by end of May 2021. Many questioned whether cash flow should have been a top priority given that most SMEs had no revenue and not just direct cash grants for furlough workers. Consequently, the Malta Development Bank launched the COVID-19 Guarantee Scheme (CGS).

This measure provides guarantees to commercial banks to give loans (limited by their current de-risking spree) to established businesses. The uptake of the scheme is modest.

In fact, local banks are licking their wounds suffered from low-performing loans and show a subdued appetite for new risks. Other ideas, which regrettably were only palliatives, not cures, were the (one-time) free distribution of €100 cash vouchers to residents which cannot be cashed but used in restaurants, certain shops and hotels. Party apologists wax lyrical that during the past seven years, the economy was riding on a crest of annual surpluses. In fact, last year, the surplus stood at 0.5 per cent of GDP meaning a surplus of €71.0 million.

The Pre-Budget document predicted that surplus is expected to turn to a deficit of 8.7 per cent of GDP in 2020 and another deficit of 4.0% next year. One may understand the reason for a massive drop in exports this year which is anticipated to decline by 12.1 per cent. It is no consolation that imports will decline by 8% as this means a lower domestic demand as well as lower capital goods formation.

The glory years of 2016, 2017, 2018, 2019 were partially resulting from an increase in domestic demand fueled by a huge increase in expat workers (approx. 70K), the cashing of passport sales and an explosion in issue of building permits which contributed largely to the affluence.

Cash from future sale of passports will drop under tougher rules recently issued to secure better scrutiny. It is an understatement to say that business community expects new initiatives from government agencies to help them tap new export markets post-COVID.

In conclusion, yes we all agree that grey clouds have tarnished our sunny island. We wait in silence, for the magic potion nestled in the October budget proposals that may wake up the recovery genii in the bottle.

The glory years of 2016, 2017, 2018, 2019 were partially resulting from an increase in domestic demand fueled by a huge increase in expat workers (approx. 70K), the cashing of passport sales and an explosion in issue of building permits which contributed largely to the affluence.