The Good, the Bad and the Questionable – The 2022 Budget Explained.

The Good, the Bad and the Questionable – The 2022 Budget Explained.

Monday’s budget speech was Mr Clyde Caruana’s first as Finance Minister. As with every budget, it’s now on everybody’s lips. However, you may feel left out, maybe aware of some of the proposals but not really knowing what to think of this year’s budget measures and lost in the 90-page speech. If you are tired of being left out, want to keep up with colleagues at work, or impress someone with your political acumen, worry no more. Spunt has got you covered.

We have sifted the policy wheat from the political chaff, read between the lines of the political low blows and patriotic acclamations, and come up with The Good, The Bad and The Questionable of this year’s budget.

The Good

Good-hearted health-care measures

First off, the Government will be widening the list of medical treatments offered free of charge. The numerous health-sector measures are also good, with continued investments in the national medical infrastructure (Blood Bank, Health Care Centres and dedicated medical facilities at Mater Dei). The sick and elderly will not be left behind.

More family-friendly measures

The Government has increased bonuses for births, adoptions, and children with disabilities. Also the In-Work Benefit scheme will see an additional €2 million in benefits directed towards working parents. Free childcare will also be provided to parents working night shifts, weekends or on a shift basis – a series of family friendly measures which we support (see why in our video on Malta’s pension system).

Providing dignity and financial autonomy to people suffering from disabilities, the elderly and the disadvantaged

People suffering from disabilities, aged under 61 and living with their parents, will now benefit from medical assistance that is no longer determined by their parents’ income, but on the individual’s own income. Furthermore, these benefits will directly accrue to the applicant rather than the parents. A number of measures are also being introduced to assist children with disabilities and to ease their educational experience, and in some cases, the assistance continues after secondary education.

Divorced or separated people will also have their pension guaranteed even if they did not accumulate a sufficient number of NI contributions when staying at home during their marriage, a measure which typically helps women.

Investing in the workers of today and tomorrow

Workers engaged in a second part-time job can now pay additional NI contributions towards their pension for a maximum of 40 hours in a given week. Whilst being a fair measure towards workers, it has the added benefit of easing off some of the pressures on the national pension fund (see our pensions video to learn the problems with the Maltese pension system). Similarly, the 15% income tax on overtime will be reduced to 10%.

Minister Caruana also explained the need to invest in human capital and how the National Workforce Strategy fits in with the objective of ensuring tomorrow’s workforce meets the demands of future high-value added industries, at better wages. As the Minister said, “you can be the richest country on the planet, but if your workforce lacks new skills, all is lost.” In aid of this, a €2 million fund will be set up, dedicated to the continued training of employees in the private sector.

Existing industrial estates will also benefit from a €470 million modernisation project, without resorting to the use of ODZ land. More infrastructural expenditure on roadworks and maritime infrastructure (such as regeneration of the Grand Harbour area) is also being planned. Similarly, the Government will seek to expand the budding film industry in Malta and regenerate several tourist areas.

Students will also see a 10% increase in their stipends, an added incentive for furthering their education. Additionally, the Government will seek to increase the number of students placed in apprenticeships within the private sector.

The environment – a (small) breath of fresh air

Interesting environmental proposals have also been introduced, such as the afforestation of the Indawar Park, which will create a national park larger than Buskett, extending from Xgħajra to Żonqor point. This is also accompanied by measures such as green urban areas, restoration of the San Anton Gardens, green walls, green roofs and turning St Anne Street in Floriana into a pedestrian garden (see our Urban Heat Island video on how these can make our summers cooler).

Active sport measures

On the sports front, there are numerous interesting projects which include water polo pitches, a national rowing tank, an outdoor velodrome in Ta’ Qali, a €20 million motorsport facility and another €7 million fund to prepare for the 2023 Games of the Small States to be hosted in Malta.

The Bad

Some of the money spent on higher pensions could have been directed at more productive underfunded areas

If you watched our pensions video, you would know why the current pension system is unsustainable. Many of our findings in that video are based on a report prepared by the Pensions Working Group, chaired by the Finance Ministry Permanent Secretary himself. We were expecting a number of reforms to be put in place to make the current system more sustainable. Instead, we observe at least 6 measures which in some way or another, increase the amount of old-age pensions. For example, one measure increases Government expenditure by €2 million, raising the pension bonus to €500 towards those individuals who do not even have 5 years’ worth of contributions. Of course, some form of adjustment may be necessary, but 6 measures seems a bit excessive.

Our main issue with these proposals is not the increase per se, but rather that the Government did not explain why these increases were actually necessary and what underlying issues they are intended to address. In the absence of this information, it’s easy to assume there is none. The Government could have used some of the money dedicated to pensions and allocated more than just €0.5 million towards entering new market niches such as digital games development, to mention one example.

To be clear, we support reasoned measures towards helping the elderly, such as schemes to support the elderly’s medical and care needs, which also protect their savings and wellbeing. However, until the Government justifies these various additional pension increases, we remain unconvinced on their appropriateness. With the current information, we rather see them as unfairly worsening the pension prospects of future retirees.

Vague spending on past injustices

Another vague money throwing scheme is aimed at “addressing past injustices” towards several former public sector employees, which in some cases would even trickle down to their heirs. Again, this unexplained spending will cost the taxpayer no less than a further €70 million.

Home purchasing benefits that weaken buyers’ bargaining power

We now move to the much talked-about benefits towards house purchases. Amongst others, the Government has promised:

  • The extension of the Home Assist scheme which is intended for low-income people to obtain bank lending
  • No capital gains tax and stamp duty on the first €750,000 for the purchase of vacant properties, properties in UCA areas and traditionally built properties, coupled with a €15,000 grant if purchased by first-time buyers and a maximum of €54,000 VAT refund on restoration expenses.
  • Extension by a further year of COVID-19 related tax-relief measures

These measures do not address the root of the cause, and may lead to a zero sum game, where tax benefits end up in the sellers’ pockets. Here’s why:

These measures may be increasing the purchasing power of buyers, but ultimately they are weakening their bargaining power. Say, for example, a buyer is interested in an affordable old townhouse that needs some maintenance. The buyer could use the maintenance needs to haggle for a better price and borrow less from the bank in the process. With these incentives however, the seller is fully aware of the Government assistance, and there will be lower chances for the buyer to get a better deal.

Why is this? The property market in Malta is a sellers’ dominated market, and as long as this disequilibrium persists, tax incentives will only fuel higher prices to the detriment of buyers (see why in our property prices video). These measures would have been very effective if they were coupled by a general curb in speculative purchases (particularly by non-residents), purchases of secondary residencies and buy-to-let purchases. We are not proposing radical measures here, and measures introduced in countries such as New Zealand can be used as a model case.

Uneducated education measures

Despite the back-to-school fiasco, the Government proposes what appear to be cosmetic measures to the education system such as encouraging teachers to advance their qualifications and renovations of some schools (see how this got the MUT fuming). These measures are of course good in themselves, but clearly, not enough to address the continued pressures faced by the Maltese education system, which is increasingly becoming a shadow of the formerly high standards it used to offer (for free) to all Maltese citizens. Having a National Workforce Strategy is pointless if future workers are poorly educated.

No black-on-white proposals on Malta’s greylisting

Despite the huge reputational impact on the financial sector from Malta’s greylisting, regrettably the Government announced no tangible or credible measures to address the issue – dedicating just ONE paragraph containing not a single proposal or meaningful progress update for protecting one of its main economic niches.

The questionable

Is free transportation the way to go?

The Minister announced that after Luxembourg, Malta will be the second country to offer free public transportation for all. Many private sector companies already offer fully refundable public transportation use to their employees. And yet, the Maltese public transport system remains unattractive. Until public transportation is tied with the traffic-jammed road network, we fear the measure will have little to no effect.

Strong with the weak and weak with the strong?

The Government said that it will be clamping down on interest payments due on unpaid tax balances to “send a clear signal that unjustified failed tax repayments will not be tolerated.” The chronic failure to collect large tax bills from tycoons certainly puts this proposal into doubt.

No adjustments to the cost-of-living adjustment (COLA) formula

The COLA is always a subject of controversy, probably because nobody really understands how it works. The €1.75 increase was clearly no exception, but this is not what we are criticising. Instead, we are criticising how the COLA is determined. Until now, it is still based on an established formula, which broadly speaking, is determined on the 12-month average inflation rate as estimated by the RPI.

We appreciate that the €1.75 may appear too low especially given the recent price hikes in most goods. However, these price hikes only took place in recent months and the fundamental problem remains the weights assigned to the basket of goods forming the RPI – this needs to be updated to reflect the modern Maltese basket of goods consumed by the typical household. We are curious, however, about the parallel framework announced by the Minister. Possibly an interesting development.

Unrealistic green energy strategy

The various green energy measures are a step in the right direction, of course, but we believe that the Government is seriously underestimating the economic impact on the Maltese economy to reach a carbon neutral target. Actually, we suspect that the national strategy towards a carbon neutral economy has not been accompanied by a feasibility study.

Currently, Malta ranks last in the EU in renewable energy usage, and meeting a carbon neutral target will cost huge amounts in investments (at least 320 wind turbines, costing about €3 million each, just to give some perspective). Furthermore, with the current technology at least, renewable energy sources are simply not reliable enough and result in much too expensive electricity bills (see the recent experience with many EU countries). While we appreciate the good intentions of these plans, we think that the promise of a carbon neutral Malta currently has no solid basis.

Squeezing the fiscal gravy train

Despite the big dent in the fiscal deficit due to COVID-19, the Government has kept huge amounts of new and extended benefits flowing. Indeed, one main issue with this budget is the fiscal sustainability of all these measures, especially when considering the dependency on very optimistic economic growth rates, as two renowned local economists have explained. This cash-happy trend has been worryingly going on for a number of years now, making any eventual reversals very politically difficult.

And let’s face it, the Government was able to flex its fiscal muscles in part thanks to the IIP. It’s true that if it weren’t for the IIP, we probably would not have seen the huge pandemic support offered by the Maltese Government. But at the same time, the IIP was one of the main reasons for Malta’s greylisting. The overall long-term benefits of the IIP are not that clear cut.

Final thoughts

All things considered, Minister Caruana’s 2022 budget is not perfect, but a decent and well-intentioned effort. The misguided housing market proposals, an unrealistic green energy strategy and an overly optimistic fiscal sustainability remain our main points of contention.

Leave a Reply

Your email address will not be published.