Abela raises expectations with ‘historic’ tax cut targeting disgruntled middle class

A planned income tax cut in the budget targeting middle-class disgruntlement has been described by the Prime Minister as “the biggest ever in this country’s history”. 

Robert Abela gave no detail but his bold claim on Sunday contrasts with the more modest approach adopted by his finance minister. 

Contacted by MaltaToday, Clyde Caruana said he “preferred not to comment at this stage” about the details that will be announced in next month’s budget. 

During the 2022 election campaign the PL had pledged that taxpayers would see the non-taxable portion of their income increase by €1,700. The cost of the proposed widening of tax bands was estimated at €60 million and would come on top of the tax refund cheques for those earning under €60,000. 

But Caruana refused to be drawn into commenting on whether the proposed tax cut would match the electoral pledge or whether it would equal the reduction implemented by the incoming Labour government in 2013. 

Finance Minister Clyde Caruana has adopted a less euphoric approach, preferring not to comment on what next month’s budget will contain

A €40m injection between 2013 and 2015 

Back then, the top income tax rate was cut from 35% to 25% over a three-year span for those earning below €60,000. The measure left more than €40 million in people’s pockets. 

The tax cut had been planned by the outgoing Nationalist administration but it never got the chance to implement the measure because Budget 2013 was defeated in parliament precipitating an election. 

The incoming PL government held an emergency budget and chose to retain the tax cut pledge even though it was not part of its electoral manifesto. 

But in historical terms, a massive tax cut had been introduced by the incoming 1987 Nationalist administration when then finance minister George Bonello Dupuis slashed the top rate from 65% to 35% in a radical move that helped draw undeclared income out from the shadow economy. It eventually resulted in higher tax revenues for government. 

The late George Bonello Dupuis, who served as finance minister for the incoming Nationalist government in 1987, had delivered a historic tax cut when lowering the top rate to 35% from 65%

Two years ago, Clyde Caruana had said the time was not yet ripe for an income tax cut to help the middle class. 

Caruana had made that declaration in an interview with MaltaToday in October 2022 on the back of a €600 million fuel and energy subsidy package just announced in the budget and an additional COLA mechanism for low earners. 

Caruana had argued that a typical middle-class family could be saving up to €700 a year on fuel for every car they own and up to €1,400 annually on electricity bills as a result of the subsidy package. 

However, he did acknowledge that a tax cut would be considered at some point in line with the party’s electoral manifesto. “As regards the middle class, the strongest measure to benefit them is an income tax cut. There is no such measure in this budget [Budget 2023] but I will see to it that this will happen, and not on the fifth year of this legislature,” the minister had pledged. 

Managing expectations 

The promised tax cut will now be announced in the October budget and come into effect in 2025, the third year of this legislature. 

But while the Finance Minister has been coy about managing expectations, the Prime Minister has gone on record describing the impending tax cut as “the biggest ever”. 

During the June European election campaign, the Prime Minister had said tax cuts would leave up to €600 more per year in a family’s pocket. He also suggested that those on the parent rate earning up to €1,000 per month would not pay any tax. 

The promise did little to assuage voters and the PL went on to see its majority in the European election slashed to just 8,000 votes from 40,000 votes five years ago. 

Since then, Abela has tried to make a direct pitch to middle class voters and last week said tax bands will be widened and the middle class will benefit from “better tax rates”. 

A large swathe of middle income earners has seen their pockets squeezed and savings shaved by high inflation over the past four years. The post-2013 feel good factor has long evaporated, also because of unforeseen circumstances such as the COVID pandemic and the war in Ukraine. 

But at the same time, many voters who supported Labour in the general election have lost their patience and are peeved at government over the millions in public funds being squandered on corruption, waste and inefficiencies. 

The Vitals case was the cherry on the cake, especially when Labour supporters went outside court to cheer Joseph Muscat, Konrad Mizzi and Keith Schembri during their arraignment on corruption charges just before the European election. 

Government’s reaction to this brewing anger by middle of the road voters was less than decorous at the time with Abela hitting out at the judiciary and journalists in a bid to defend his predecessor. 

Now, Abela is hoping he can reverse the decline by delivering a generous tax cut on top of the hefty energy subsidies. 

Whether the budget will deliver on the expectations Abela is raising will have to be seen. Government’s room for manoeuvre is somewhat conditioned by the excessive deficit procedure imposed by the European Commission although the rules are much more flexible today than they ever were. 

Nonetheless, the bigger question mark is whether a tax cut will be enough to allay voter impatience with Abela’s tired government no matter how generous it will be. 

What Labour said in the election campaign 

Robert Abela, flanked by Clyde Caruana and Silvio Schembri on the second day of the 2022 election campaign when the PL unveiled its tax relief proposals

On the second day of the 2022 election campaign the Labour Party had unveiled its tax relief proposals, which it pledged to implement gradually over the five-year span. Apart from the continuation of the annual tax refunds, the government has so far not implemented its pledge to cut personal and corporate income tax. 

Personal tax 

For parents, the first €12,200 of income earned will not be subject to income tax – up from €10,500. 

For single persons, the first €10,800 will not be taxed – up from €9,100. 

For married persons, the first €14,400 will not be taxed – up from €12,700. 

The measure would see €60 million more being left in people’s pockets. 

The tax refund cheques for those earning less than €60,000 will continue being dished out, a further injection of €24 million. 

Corporate tax 

The PL also pledged to lower the corporate tax rate to 25% from the current 35% on the first €250,000 of profits earned in a year. 

The proposal was estimated to save companies up to €25,000 yearly.