Stop whipping the middle classes! This is Vince Farrugia’s plea to government and one of the main tenets of the GRTU’s proposals for solving Malta’s economic problems.
Speaking to me this week during an interview at the GRTU offices in Valletta, Mr Farrugia highlighted two areas that require urgent and serious attention if Malta’s economic situation is to improve. The first is easing the tax and fiscal burdens on the middle classes. The second is reducing public expenditure dramatically, something government has stated many times it is committed to, and produced a number of plans to achieve, the latest announcing cuts of Lm10m across the Public Service, having been publicised last week following the critical EU report on Malta’s (and several other new EU member countries’) financial situation.
I asked Mr Farrugia for his comments on the newly announced government plan to cut expenditure by Lm10m. He was sceptical.
“Well, they have been saying they plan to cut expenditure since 1998,” said Mr Farrugia.
“It seems we are very good at devising targets and writing reports to impress the Commission, but not so good at achieving them. There is no reason this plan is any different from the others. I’ve been sitting through meetings and discussions at MCESD for 10 years, as well as a host of other forums and discussions – I’ve been hearing all this commitment to reduce expenditure, but I am not convinced. I can’t see any drastic determination to cut expenditure.”
The problem, Mr Farrugia continued, is that despite warnings and advice from international institutions, individual economists and fiscal policy experts as well as organisations like the GRTU over a long period of time, public expenditure continues to rise, rather than fall.
“This is our first problem: that the public sector is growing rather than diminishing as it should be,” he said.
“An incredible 53 per cent of GDP goes to the public sector, including the extra budgetary units. Even without the EBU’s government’s total expenditure still absorbs a massive 50 per cent of GDP – Malta is the only country in Europe with such a high rate. In efficient modern economies the general government total outlays, as a percentage of GDP, should be no more than 35 per cent... in the UK this ratio is 36 per cent, Japan 38 per cent and the US, probably the most successful economy today, the ratio is 29 per cent.”
Past commitments to reduce public expenditure have failed, he added, because politicians on both sides of Parliament have used expenditure cuts to gain political advantage, thus condemning any real initiative to eventual failure.
“Why don’t I believe that plan to reduce expenditure will work?’ he asked. “Well, because the two sides of Parliament must sit down and come to agreement on this issue, not just jump on each other every time there is an attempt to reduce expenditure. If they don’t sit together in the House and say, we can’t keep expenditure at 53 per cent of GDP, if they don’t agree in Parliament that they have to solve this monster of public expenditure, it can’t succeed.”
“What happens every time?” he continued.
“They commit themselves to a reduction in expenditure, then the government workers want a raise and the next thing we know, an election is on its way and we hear of a new collective agreement being signed. And it’s the same in everything, they keep doing it, and my belief is, even if they eventually manage to close the budget deficit, they won’t be able to maintain that situation. They will just open it again.”
The cries for consensus between the two parties on issues of national administration and urgency have been echoing across the island for years now. Attempts to achieve consensus on many key issues have generally failed, and finger-pointing is practiced by all involved. However, as more and more initiatives are stalled around intended consensus-seeking tables, the number of voices calling for key issues to be resolved outside the partisan arena is growing. Many of us outside the fray are astounded to hear of one failed attempt after another, but as each situation is exacerbated and worsened by the delay in finding and implementing solutions, it is clear that solving issues must be the foremost priority of those involved.
The GRTU’s ideas on how Malta’s current economic problems should be resolved centre around reducing public expenditure by eliminating wastage and ensuring public investment is carried out in a cost-effective manner.
“Frankly, people no longer trust government in certain things,” said Mr Farrugia. “They are sick and tired of government’s wastage of their money – look at roads: we are taxed Lm75m a year through car registration and licence fees, taxation on fuel, and so on. What does government do? They spend a lousy Lm7m to Lm10m a year on roads. Is that the way to give people fair return on their money? Take the new hospital – was that planned economically? I think we all know by now that it was not done in a cost efficient manner. Then we have Authorities mushrooming all over the place. Take just the Malta Maritime Authority as an example. It used to be the Ports Department, a small, efficient outfit that used to make money. Now it is a huge organisation and of course, all sorts of new charges had to be created to sustain this huge Authority.”
The question of new charges being introduced across the board to sustain new Authorities, Commissions and other government entities is one that has been raised by industry representatives across the board, however, it is M Farrugia’s contention that they hit small businesses harder, and small businesses are already carrying a heavy burden. This is what has prompted the GRTU’s petition to government to ease the burden on the middle classes.
“The majority of people we represent in the GRTU belong to the middle classes,” explained Mr Farrugia.
“The average self-employed person in Malta takes home the equivalent of the pay of someone in middle to senior management. Over the years this is the class that has been suffering the burden. No longer taking any benefits from government like children’s allowance or family benefits, they tend to pay charges for services that lower income people do not. The State keeps taking more money from them, with a crudeness that is not immediately obvious. For example, the change in the tax bands four years ago squeezed the disposable income available for the middle classes, and once you hit the pocket of the middle class you hit the other side of the economy. It is their expenditure pattern that sustains local business. It is the middle classes who eat in restaurants, purchase VAT-able goods and services and keep the economic wheels turning. People with lower incomes pay little or no tax, they take benefits from government, free schooling and medical care, and their consumption pattern tends towards spending on non-VAT-able goods. The middle classes, who saw the change in income tax bands shoot their taxes up from 25 per cent to 30 or 35 per cent, are also the same people who are purchasing VAT-able goods and services. We now have a higher ratio of people paying at the higher rates of income tax, and that should not be the case.”
The GRTU represents more than 7,000 self-employed and small businessmen and women, who collectively run a total of some 12,000 enterprises. The self-employed and small business sector consists in total of some 20,000 individuals, who collectively employ some 55 per cent of those working in the private sector, that is, more than 50,000 people. These people constitute a large portion of Malta’s middle classes, and Mr Farrugia is convinced that alleviating the financial burden on this sector of society is crucial to solving Malta’s economic problems.
“Government is following a fallacious economic strategy,” he said, “in increasing taxation to cover excessive expenditure, and taking always from the same middle class, who are basically sitting ducks. The middle classes have become the main whipping boys of government and the economic consequences of this are that as long as the disposable income of the middle class remains squashed, demand for goods and services will remain dampened and the economic cycle remains unstimulated. These entrepreneurs cannot afford to invest in new ventures or introduce new technology as a result and the effects of that are very evident today.”
So what does the GRTU see as the solution, I asked?
“Luxembourg recognised the importance of the middle class to economic progress to the extent that it now has a minister for the Middle Class,” replied Mr Farrugia.
“In Austria, where they went through a similar post-accession situation where businesses faced the same belt-tightening and restructuring that we face now, they slashed the highest rate of income tax from 35 per cent to 25 per cent, and this proved a very successful initiative. So we believe that government should do something different here. At the moment they are frightening people out of their wits, people are afraid of what is going to happen with pensions, with welfare – all these issues are scaring people. What needs to be done is to create a feel-good factor in the local economy. Ease the burden on the people who will invest, and as soon as we take one step forward, this investment will follow and we will see an immediate drop in unemployment. The psychological impact on the economy cannot be stressed enough, and today this is having a negative effect that we can all see, hear and feel.”
While government’s latest plan to meet its deficit reduction target was reported as being based on expenditure cuts and not increased taxation, sceptics are already questioning this statement. Mr Farrugia is going a step further and calling for taxation to be reduced, concurrently with drastic expenditure cuts, as a means of stimulating consumer confidence and spending, and providing the impetus for further investment.
“The message from the Austrian government to their people when they slashed income tax by 10 per cent was that they believed in the people enough to leave money in their pockets,” said Mr Farrugia. “They were proved right and I believe the Maltese government should believe in its people enough to leave money in their pockets too.”