EU elections: Business and the environment

I was present yesterday for the launch of a Business Manifesto addressed to MEP candidates. The Manifesto entitled “We’re in Business together. A Maltese Business Manifesto.”  lists the expectations of the business community. The launch was organized by the office of the European Parliament in Malta.

As expected the manifesto deals extensively on the role of business in job creation, its importance to the economy, the vulnerabilties of SMEs and the difficulties faced by Maltese Business, mostly micro-business, as a result of both its size as well as Malta’s peripherality and insularity.

The five business organisations did a good job with one exception. They were apprehensive about environmental and social issues. The business manifesto does not refer to environmental and social issues except in a negative manner. There is no valid reason for this position. The experience of Maltese business organisations (with very few exceptions) points elsewhere. It is generally a positive experience.

May I remind that the Federation of Industries, now forming part of a unified Malta Chamber of Commerce, Enterprise and Industry had years back endorsed and adhered to the UN Global Compact. The Malta Business Bureau has embarked on a water awareness campaign, GRTU through  enterpreneur Noel Gauci (together with others) has been at the forefront of research on wave energy and its applicability to Malta to tap alternatve energy sources.

Similarly on socal issues most Maltese SMEs are good employers and it would be a misrepresentation if one were to focus on the negative comments on social issues in the Business Manifesto as being representative of Maltese Business.

Maltese Business and SMEs in particular have to view environmental and social issues not as obstacles but as challenges which can be transformed into new opportunities. Those who realise this and put it into practice will lead the way. The others will follow.

Environment Policy and the Budget

The National Environment Policy Issues Paper, launched by the Parliamentary Secretary for the Environment, Mario de Marco, on July 27 requested the views of the public on a move towards a taxation system that “penalises pollution rather than jobs”.

When launching the 2011 pre-Budget document on the same day, Finance Minister Tonio Fenech was more clear as to the government’s intentions. Under the heading Tax Shifting, he proposed the shifting of taxes from economic goods to economic bads. The pre-Budget document goes on to say: “In order to incentivise the creation of work by making labour less costly we are proposing the lowering of government-induced employee costs as well as corporate and income taxation.” The pre-Budget document then praises the merits of a carbon tax as a fiscal tool.

It seems that both the minister and the parliamentary secretary have forgotten that taxation does not penalise jobs. It is an instrument for the attainment of social solidarity. That is what the post-1977 Nationalist Party I remember was in favour of. It seems that time has changed the PN. It cannot be anymore described as being “un partito di centro che guarda a sinistra” (a party of the centre that looks to the left), as the old guard, quoting Alcide de Gasperi, justifiably boasted.

The drafters of the documents launched could have consulted the Cabinet-approved National Sustainable Development Strategy for the Maltese Islands (page 59), which established 2008 for the conclusion of a strategy on environmental taxation. The year 2008 is 32 months away and the strategy on the use of economic instruments to regulate environmental impacts is still not in place. Instead of asking for views of the public they should have drafted the strategy that has been promised but not delivered. It could be a useful guide for the finance minister.

At issue in this debate on tax shifting are points already emphasised during the eco-contribution legislation debate in 2004/05. Which ministry will be in the driving seat of environment taxation policy: Finance or the environment? Will the primary objectives of environment taxation be environmental or fiscal?

The strategy to be adopted and, thus, the specific proposals to be brought forward will depend on whether fiscal policy is used to regulate and reduce environmental impacts or whether the environment will be used to compensate for shortfalls in tax revenue.

After 17 years, the government has woken up to the proposals of a Jacques Delors EU White Paper in 1993 on growth, competitiveness and employment [COM (93) 700 final] who had the argued in favour of taxing environmental impacts and resource use.

In its 2008 electoral manifesto, the PN promised it will reduce income tax in the higher bands. It is now seeking ways to deliver without subjecting the Exchequer to further problems. It is very unfortunate that an inappropriate tool was selected. As a result of the tax shifting proposal, a tax, which is socially progressive (income tax) will be partially substituted with a carbon tax that, viewed on its own, can be socially regressive. The proposal aims to reduce taxation from a band which is paid mostly by companies and those who have a substantial income. To compensate for the resulting shortfall, it will spread the tax-load on everyone without discrimination, irrespective of their means.

Once the government decided on the reduction of the higher band income tax, I understand that it did not have much of a choice. In order to ensure a regular flow of income, which would have to substitute a reduction of the forfeited income tax, it had to select a subject in respect of which (at least, in the short term) demand is largely inelastic to tax-induced price changes.

It would be interesting if any studies on the impacts of the pre-Budget tax-shifting proposal are available. Such studies should clearly demonstrate the two basic flaws of the proposal: first it’s being socially regressive and, secondly, it’s exploiting of the environment as a tax revenue generator without ensuring environmental improvement as a primary objective.

If environmental improvement was a primary objective, the projected tax revenues would not be generated as they would be reduced gradually, in line with environmental improvement.

A carbon tax would force business and industry to address their environmental impacts. However, the impacts of a carbon tax on SMEs and households have to be assessed more carefully before policy declarations are made in view of the limited size of the former and the lack of resources of both. Given that most of Malta’s business is in the SME sector, matters should first be studied in their proper perspective before declarations are made or decisions taken.

There are various alternatives to the government’s proposals. Each one of them must however be tested through studies to ensure that the social and environmental impacts of fiscal policy are either positive or else substantially mitigated.

Studies made must be available at this stage. Otherwise, the discussions on both the National Environment Policy and the pre-Budget document would be just kite flying exercises.

 

published in The Times Saturday, September 4, 2010