The man who holds the purse strings

Dividends are still going to be taxed at 35 per cent for those who benefit from the earned income tax reduction to 32, 29 and then 25 per cent. It was suggested that dividends paid from reserves set aside prior to basis year 2012 will be taxed at 35 per cent, but that as from basis year 2013, the tax refund will be at the same rate as their earned income. What are you going to do?

We promised to implement the measures promised in the 2013 Budget. This is what I inherited. The tax department assured me that we could not afford to extend the tax rate cut to dividends, but only to income.

The costing of the tax cuts was worked out only on earned income. They did not go into what companies would pay if we took the imputed system and worked it through.

If you ask me personally, should they be taxed at the same rate? Of course, in time, when the country can afford it. And not because it is a travesty of justice – justice is what you decide – but because I am creating a bias towards deposits and savings in banks as against investing in shares. As an economist, I would have done it the other way around. I want to incentivise people to buy shares, which is the future for all the businesses in Malta, including family businesses. But this was a political promise and we delivered it as is.



I want to incentivise people to buy shares, which is the future for all businesses
I want to incentivise people to buy shares, which is the future for all businesses


But it has to be solved. If I am in the 25 per cent category now I will eventually get a 10 per cent rebate, while those in the 35 per cent category now whose rate is reduced to 25 per cent will not!

There are different tax brackets, and we now have one for dividends.


So it will remain in place until the country can afford it?

Yes. But it should be high on the agenda because it is an important bias. This is something we should address as early as can be, because it has an impact on company development.


The government promised to look at bank interest rates. Have you done so?

I sent a letter just after the Budget to both the Malta Competition and Consumer Affairs Authority (MCCAA) and the Malta Financial Services Authority. We could also have sent it to the Central Bank, as they have more expertise on this than anybody else.

Strictly speaking, the law only mandates the MCCAA to deal with this. But the authority never looked into it. There were complaints about high charges and interest rates, especially from small businesses, some of which are represented by the GRTU, which got louder and louder – and we acted. We are now expecting an interim report from the MCCAA and the MFSA.


Isn’t it a commercial reality that banks have to face? If the interest rates are not high enough, they would not take the risk and give out loans.

I agree. We also know that because of our size, it is very easy for a few banks to have a mono-polistic market structure.

There are a lot of indications. One could come – as in fact happened – from SMEs; the other is by analysing the data. There is a clear conclusion by the European Commission that the two banks have a monopolistic situation – even though they cannot help it.

The directive would check if there was abuse of that structure. You could look for the smoking gun of collusion, which is very difficult to find … You are never going to find an entry in a diary about two entities meeting and saying ‘let us rig the interest rate’.

The other is to look at the results of their activity. The Commission in its in-depth review probably must have seen what I was requesting in my Budget, and pre-empted it, coming up with some quick but strong results.

The spread between the interest rate charged for loans and the interest rates on despots is far wider than in any other country in the European Union. Those are data which the two entities can investigate further.

The Central Bank has come out with its own evaluation and conclusions. There is also another chart in the review which suggests that there could be restrictive practice, as they call it, where the banks use their position to their advantage.


But if you interfere with the interest rates they charge, especially now given the amount of Tier One capital that they need to retain for regulatory purposes, they will simply not lend…

Agreed. I do not want to pre-empt the outcome, but I do not think that the government would start firing from the hip like a cowboy. This is a sensitive and delicate time for banking. We are aware of what is in the pipeline for banks, especially those in the eurozone who are part of the banking union.

Millions are going to be spent by the regulator and the banks in order to evaluate the quality of their assets, to stress-test the workings and fill any gaps.

Within three to eight years, depending on the banking intergovernmental agreement, they will have to contribute to the Single Resolution Fund, which will be around €50 billion. That is going to come from banks, as from now on the taxpayer will not pay for bailouts.

And there is also the Deposit Guarantee Scheme.

So you have to choose. Do you want to weaken the banks or do you want to wait? By all means, the exercise will be done. We cannot pre-empt the outcome – it is important – but at the same time we cannot ignore the current landscape with its risks for banking liquidity and profitability.


The Labour Party also promised a Development Bank in its electoral manifesto. Has anything been done about it?

Again, you have to be careful. Unless you really know what you want, just don’t do it.

For the moment we are well served. We have the European Investment Bank and the European Investment Fund, both for long-term projects and for industry.

I invited EIB president Werner Hoyer to visit us at the end of April with a delegation. They are sending an operation mission soon, to see what bankable projects we have in Malta. They will visit the power station and the gas project to see whether they can assist. They like this sort of projects. We will also be looking at housing and schools among the top priorities for Malta. But we are already very well served.


So why did you promise a development bank? Was it just an electoral promise that sounded good?

The UK and France have plans for development banks … We do not want to compete with commercial banks. But if there is a niche like handholding SMEs and things that BOV and HSBC cannot do, then yes. We have experts working on it but we are not rushing. A development bank is a serious thing.


The government will be bringing in over €1 billion from the citizenship scheme. Some of this will be put into a national fund for projects. How is the money going to be split up and used?

We will know more when the wealth fund is set up, together with a prospectus and a board of directors.

Every Tom, Dick and Harry has his own wishlist and I have seen so many requests … I believe like any wealth fund, we should make sure that the money is well invested and that it should strike a balance between getting a good return and at the same time contributing to Malta’s economic and social development.

It was probably delayed because the whole issue was so long-drawn-out. Hopefully we can look at setting up the structure in the not-too-distant future. Cabinet has to decide on this.


Which ministry, which projects? We are going to bring in as much as a billion and we don’t know how we are going to spend it? Is it just something nice to have for Christmas?

We are not going to get a billion now; it will be built up. I think the structure will be set up in the near future. That is my hunch. But as you know, it is not in my ministry’s remit. At the moment.


The ministry is carrying out an ongoing review of the Budget allocations and actual spending. How are we measuring up this year with regard to expenditure and revenue? Are the other ministries keeping within their limits?

Before, I was promising that we were on track, but now the results are actually coming in. The final deficit figure – which we have strong reasons to believe will be under three per cent – has not yet come out because the Treasury and the NSO send the data to Eurostat for verification and the figure will come out in the third week of April. But whether it is 2.7 or 2.8 per cent, I cannot say. There are technicalities regarding EU funding and so on.

The Commission first forecast 3.7 per cent, then 3.4 per cent and in the final winter 2014 forecast it was 3 per cent. This was encouraging. It was a way of saying that it was coming around to our point of view: that we were on track.


However, you also wanted an internal review to check estimates against actual spending?

There are two ways to tackle this. One was to say ‘no’ with the excuse that there was no money, no matter what the request was for, even if it had implications on life and death.

There is a better way, a top-down process, which many modern countries like the UK, Sweden and the Netherlands have adopted.

I asked the IMF for help and they were in Malta a week or so ago. I hope there will be restructuring. We should be focussed on finance. We don’t even have a tax policy unit – the first question the IMF asked!

We need to remove all the warts. I want to integrate our very strong and competent group – the economic policy department – which at the moment is far away not only location-wise but also in terms of process … They are responsible for the Economic Review and a chapter or two about modelling. But they are not integrated into the budget-ary process.

I would hope that in the future we would be able to compare the cost of a hospital bed here and overseas, and ask why Church schools with teachers in the same unions with the same salaries cost so much less per pupil than in government schools.

Why should I look at Eurostat to benchmark before I meet a minister? The civil servants should prepare all this documentation and tell us where we could trim and where we should add …

I am not saying that the ministry should lead reform in health, education and social benefits. That is not our function. But the Prime Minister and Cabinet should be aware of where we are out of line … And then it is up to the Prime Minister to push the reform. No minister is going to come forward and say he or she has decided to cut 10 per cent from their budget!

I am aware that there are a lot of exercises under way which could also cut costs by 10-15 per cent without any impact on output. And in the past a project would get a bit of money, but this is probably useless as it will not be enough to get the project off the ground. Better to just say ‘no’ and give him enough next year. This has to stop.


You were talking to Eurostat to see whether we could simplify the accounting system, currently both cashflow and accruals. Have you made any progress?

Yes. The accruals system will be coming into Europe – but it is a long process and we cannot wait for the European standards. Every country has their own at the moment – not the same as in the private sector where everyone is using the same standard!

There is training under way, with the Treasury at the forefront, and it will be introduced slowly.

I think very highly of the Treasury – not only because of this but also because of debt management. National debt is a risk not only because of its size but also because of the way it is managed. The Commission has mentioned very favourably that Treasury’s management removed the public debt risk because it managed to sell long-term bonds and reduce short-term bonds.


And finally Cola. Is it here to stay? Is it to go? Is it to be linked to productivity?

I was the person who represented all the constituted bodies on the employers’ side when we negotiated it in the early 1990s.

I can assure you that it is benign. It is not what they try to make it out to be … It is not wage indexation.

Caritas were very concerned and said that minimum wage earners get the cost of living allowance but do not get anything else to benefit from the development of the economy. But that is not the way it is.

Whether by coincidence or by intention, whoever came up with this automatic formula ensured that it gives a higher contribution to the lower wage earner, and a lower compensation the higher your wage, because it is an absolute amount.

If you earn slightly above the minimum wage, you get the exact percentage but if you are on minimum wage you get more than the actual inflation rate. This has kept the minimum wage earner growing very close to the average Maltese wage.


But it is still not linked to productivity.

Productivity is an increase in real output per person – not nominal output. Cola compensates for price increases, not for output.

When they talk about this, the concern is that if productivity is negative, should they get the Cola? In my time, there was an escape clause; Cyprus has one. But the government and the unions want to keep it as it is.

We don’t believe it has damaged the economy during the recession.



– Thursday, 3rd April, 2014

by Vanessa Macdonald

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