Author: George Mangion - Senior Partner PKF Malta
Published on The Malta Independent: 6th January 2022

Reading the prognosis of the wise men headed by John Cassar White at the Fiscal Council, they proudly predict in the DBP, that total investment growth in 2021 is set to accelerate to 8.8%, with broadly similar growth rates for public and private investment.

Consulting the recently issued Draft Budgetary Plan (DBP) this points to an acceleration to 6.5% growth in 2022. Against this background, the fiscal deficit is expected to widen to 11.1% of GDP in 2021. This reflects the elevated expenditure on support measures, as well as the slow recovery in tax revenue.

For 2022 ,the government's target is to try lower the fiscal deficit to 5.6% of GDP. Obviously requests to extend the furlough scheme to March have not been factored in the DBA so more public debt will result. More public borrowing may land us to exceed the Maastricht rule of 60% of GDP.

Not so sanguine , are the views of associations for hotels and catering as they report slow business and low attendance at eateries and hotel banquets during the festive season . This was blamed partly on stricter health department rules and the high cost of menus . With almost 30,000 persons under quarantine and an average of 1,350 daily infections, there is little room for experimenting in casual social encounters so popular at the time of the year.

Fiscal remedies for facilitating the pain of pandemic were been requested from many directions. Last year,  prior to the announcement of 2022 budget, the Malta Employers' Association has called for a temporary reduction of VAT, reduced corporate tax on post-Covid-19 investment and other fiscal measures to help businesses cope with the fallout from the pandemic.

Now, it is the Nationalist Party turn who wants the government to step in and offer financial aid to the tourism sector until at least March of next year. It listed a series of measures to ensure sustainability in the first three months of 2022.

In a pragmatic way, it called for a moratorium on Malta Tourism Authority licensing fees and slashing VAT on hotels to 7%. The question arises can the country afford such concessions. The annual deficit of 11% for this year is a record high but the prime minister thinks that reserves are good and sees no objection to extend the furlough scheme. Why is the ministry of the economy preferring to issue cash vouchers of €100 each to the public (costing about €45 million each time) as opposed to lowering VAT.

The main objection is the suspicion that the pass through to consumers is not guaranteed given the weak supervision of cash register Z readings by respective departments. Empirical studies were conducted in 2009 which assessed the economic factors that may result in a reduction in tax on hotels and restaurants. Still, the government decided not to reduce VAT.

Recently we note how EU countries have been rendered more competitive as they temporarily reduced Vat. One cannot expect a 100% pass through on menus resulting from a VAT reduction, as facts show that the highest was 82% in the case of Sweden's reduction of VAT on books in 2002.

Whilst the exact degree of pass through cannot be determined, studies on similar measures adopted in other countries indicate that the degree of pass through was not full.

In Malta, most likely that if cash registers are wired direct to a central register at VAT office, then better surveillance will result. Once, a reduction is in place, competition may be such that restaurants are forced to reduce their prices.

It stand to reason that both the higher profits and subsequent  increase in wages and salaries for restaurant staff will result in a higher household disposable income, which induces further increases in domestic consumption levels. In the 2009 study, the cost of reducing vat to 5% was assessed to reach €32 million annually after taking into consideration some claw back resulting from the positive effect of the measure on economic activity. This will primarily include:

1. higher VAT revenue resulting from increased consumption of other goods and services as a result of the increase in household disposable income;

2. higher income tax and NI revenue as a result of the increase in employment;

3. higher income tax as a result of the higher profits by the sectors which are positively affected by the measure;

4. higher revenue from import duties as a result of the increased consumption

The hospitality sector, particularly restaurants and hotels will be the principal  beneficiaries of this policy( now requested by MHRA,PN and MEA ). However because of  industry linkages with tourism, there exists other sector benefits, namely agriculture, food and beverages, and the wholesale, retail while other sectors include manufacturing concerns, transport storage and communications, financial intermediation and other service industries.

As a hypothesis, one assumes that the lack of pass through will be translated into higher profit margins by the restaurants sector. It is assumed that these will be totally declared and taxed under the maximum rate of 35%, such that Government will recover some of the lost revenue. So far, there are no studies to measure the element (if any) of under declaration of vat in the hospitality sector. Naturally, post pandemic the effect of a 80% reduction in tourist arrivals would make comparison with the 2009 study -faulty.

That is why, PKF had commenced a preliminary study of the effect of a vat reduction on hotels and restaurant sector in 2018. The document was discussed with the finance ministry but no recognition of the study was taken in the succeeding budget.

Now, noting the drop in arrivals, it is important to measure the positive impact a reduction in VAT will have on our competitiveness compared to other tourist destinations. It shouts out loud that Malta is the EU country in the entire Mediterranean region with the highest VAT rate in the hospitality sector.

As restaurants form a vital element of a tourist's stay and overall spend, any reduction would considerably increase Malta's attractiveness as a tourist destination. The cost of issuing another batch of cash vouchers (discrepancies were discovered in an NAO audit) may have public appeal but will not be the right medicine for the industry. Both hotels and restaurants report a scarcity of trained workers.

Observers blame this shortage due to low wages paid and hope that an improvement in profits will result from a fiscal reform. Also greater fiscal transparency is guaranteed by charging different rates on food and beverage sales (Cannes charges 4% on food and 22% on alcohol).

In conclusion, a cheaper meal served in restaurants has a positive social impact and an increase in standard of living, lowering social exclusion while inducing a going concern future for the industry.

A prosperous New Year to readers.

Author: George Mangion - Senior Partner PKF Malta
Published on The Malta Independent: 6th January 2022
Get in touch: info@pkfmalta.com