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Budget expected to feature further shift from direct to indirect taxation

Edward Scicluna Minister of FinanceThe government has slightly lifted the lid on its Budget plans, saying in a draft sent to the European Commission that its fiscal measures include a further shift of direct taxation on labour towards indirect taxation, without further raising VAT.

It said its permanent discretionary revenue measures will include the International Investor Programme which is expected to render 0.57 per cent of GDP in 2015.

It said its permanent discretionary revenue measures will include the International Investor Programme which is expected to render 0.57 per cent of GDP in 2015.

Further revenue in indirect taxation equivalent to 0.30 per cent of GDP will be levied on consumer goods and services and 0.06 per cent of GDP consisting of a revision in fees on market output, to compensate for the revenue foregone due to the lowering of income tax bands.
“This in line with Government policy to shift tax burden away from labour income while still keeping the same VAT rates.”

The ministry said the asset registration scheme launched this year is expected to increase the income tax base through the newly declared assets and is expected to contribute additional income tax revenue per annum.
The increase in pensionable age announced as part of the 2006 pension reform is expected to contribute an additional 0.14 per cent of GDP in national insurance contributions.
These measures total 1.11 per cent of GDP and will be partly offset by the further reduction of 4.0 percentage points in the middle income tax bracket estimated at 0.24 per cent of GDP, the lost revenue stemming from the one-off investment registration scheme fee received in 2014 amounting to 0.13 per cent of GDP and lower temporary revenue amounting to 0.02 per cent of GDP.

Discretionary expenditure measures are expected to be relatively neutral on the deficit. Measures which will exert an upward pressure to the budgetary balance of 2015 include:

1. Higher expenditure over 2014 equivalent to 0.08 per cent of GDP towards an annual supplementary children’s allowance which is conditional on attendance to school, health check-ups and psycho-social attention. (The increase over 2014 is due to the measure being only affected as of September 2014.)

2. A higher equity injection to Air Malta in 2015 equivalent to 0.34 per cent of GDP.
These upward pressures will be mainly offset through better control of the public sector wage bill. These are expected to yield 0.12 percentage points of GDP in lower expenditure, by attaining to the target of lowering the replacement rate in non-priority areas and better control on the non-wage component of the personal emoluments.
The draft says that the government’s tax revenue is expected to grow only marginally faster than nominal GDP growth.

“The tax burden is expected to rise from 34.8 per cent of GDP to 35.2 per cent of GDP under a no policy change scenario as depicted in Table 3. This increase is primarily due to taxes on income which are expected to rise by 0.56 percentage points of GDP.“

Taxes on production and imports and capital taxes are expected to maintain an unchanged ratio to GDP. On the other hand, social security contributions as a share of GDP, under the no policy change scenario, are expected to decline by 0.15 percentage points. Similarly, a drop of the same magnitude is expected in the share of other revenue

The government said it is expecting the debt to slip below 70% of GDP for the first time in many years while the deficit is projected to narrow to 1.6 per cent.
The GDP growth rate is being raised to 3.5% in real terms while jobs are expected to increase by 1.9 per cent.
Unemployment is expected to remain stable at 5.9 per cent# Malta’s deficit will slip below 70% of GDP.

See the document on pdf below or at
(Source Times of Malta 16 October 2014)