‘Budget 2021 A Flurry Of Expectations’ – PKF’s George Mangion

Author: George Mangion
Published on The Malta Chamber 8 October 2020

With uncertainty surrounding how long the world will have to deal with COVID-19, PKF’s Senior Partner, George Mangion, remarked that businesses are not to blame for “taking a pause for thought before taking any big spending decisions”. “Shoppers may also be nervous about a full return to normal with the miserable experience of sanitised socialising potentially combining to dampen spending,” he remarked in the run-up to the Budget 2021 announcement.

This year is a tough one for Prof Edward Scicluna, who some weeks ago published the pre-Budget document for 2021, commented Mr Mangion.

Malta being no exception, suffered its first total lockdown for all schools, university, colleges, airports, gyms, bars, restaurants, hotels, English language schools – with such organisations facing zero revenue between March and June.

“We also have our own home-grown troubles such as a debt-laden national airline having sacked 69 ex-captains and flight officers but now the Economy minister offered them temporary jobs with the State bureaucracy- at full pay.

“Employers are asking for a reduced vat from 18 per cent to 15 per cent and a lower rate of 5 per cent on hospitality and restaurants.”

He added that many fear austerity is expected in the 2021 budget, to be announced on 19th October, “such as the introduction of pseudo taxes and tougher sanctions by MFSA and FIAU raiding the offices of corporate service providers (under a shower of Moneyval scrutiny)”.

Mr Mangion highlighted fears raised by low-income workers and pensioners, who stress they will not be able to survive another year without appropriate welfare benefits.

He went on to comment on the importance of Government aid packages to “soothe the pains of economic operators” caused by the pandemic.

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

The announcement of a wage supplement started at the beginning of April which up to the beginning of July, around 16,612 businesses have benefitted from the wage supplement scheme, covering a total of 79,576 employees. Government has since confirmed it will last beyond October.

“This scheme was beneficial to delay mass redundancies during the lockdown period albeit it created a false picture of the fragile job situation.”

Other innovative measures aimed at reducing business costs included the quarantine leave grant of €350 given to employers or full-time employees.

A token reduction of electricity charge granted this month to annex A and B and C claimants for 50 per cent 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 the 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 SME’s had no revenue and not just direct cash grants for furlough workers. In fact, local banks are licking their wounds suffered from low-performing loans and show a subdued appetite for new risks.

“This heaps more pain for SME’s seeking credit. Other ideas, which regrettable were only palliatives and 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( one hopes another tranche is issued).”

Mr Mangion further commented that, in retrospect, 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 the surplus is expected to turn to a deficit of 8.7 per cent of GDP in 2020 and another deficit of 4.0 per cent next year.

“One may begrudge the deficit due mainly to a massive drop in exports this year- anticipated to decline by 12.1 per cent.

“It is no consolation, that imports will decline by 8 per cent, as this means a lower domestic demand as well as lower capital goods formation.

“With hindsight, the glory years of 2016, 2017,2018,2019 were partially resulting from an increase in domestic demand fueled by large imports of ex-pat workers (approximately 70,000), the cashing of passport sales and an explosion in the issue of building permits which contributed largely to the affluence.

“Cash from the future sale of passports is expected to drop under tougher rules recently issued to secure better scrutiny.

“The popular wish is for the 2021 budget to act as the enzyme in the Petri dish, acting as a catalyst to facilitate faster reactions among economic agents.”

George Mangion

The Government will be unveiling the much-anticipated Budget 2021 on 19th October 2020.

Author: George Mangion
Published on The Malta Chamber 8 October 2020
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