Issue link: https://maltatoday.uberflip.com/i/881840
maltatoday, SUNDAY, 1 OCTOBER 2017 Events 42 PKF launches a study on poverty and the restaurant sector MARIANNA DE FRANCHIS Economist PKF Malta mdefranchis@pkfmalta.com According to the latest 2016 pub- lished data, Malta registered a reduction in the risk of poverty and social exclusion (AROPE) rate from 22.4% to 20.1%. Goal achieved? Maybe not. It is in- teresting to note that when one analyses this value by age group or household type one finds evi- dence that this improvement has not benefited everybody. Economists have a habit to ques- tion whether in times of boom the trickle-down mechanism actually works. How efficient is the dis- tribution of wealth? Is it reaching down through the capillaries of the population strata, including low wage earners and pensioners? The answer is that it is not reach- ing everyone since in the case of pensioners in the age group of 65 and over, the AROPE rate in- creased from 23.7% in 2015 to 26.1% in 2016. By 2030, the number of people within this age group will exceed that of young people aged 15 to 24, so what follows then? Moving on to the subject of restaurant sec- tor one can quote Julian Sammut, managing director of Kitchen Concepts (a major chain of restau- rants) who in an article published in the Sunday Independent last July, argues that the restaurant sector is facing a big challenge and quality is faltering. In his opinion this is caused by high rents, excessive competi- tion, some restaurants forced to cut costs by under paying non-EU waiting staff, difficulty in finding experienced staff and low profit margins. For all of these reasons and probably many more, some restaurant operators resort to tax evasion to make ends meet, which although not condonable yet it seems to be quite a Hobson's choice. This summer, PKF Malta in pursuance of its corporate social responsibility has decided to con- duct two studies on a pro bono ba- sis. It hopes that conclusions will give a scientific basis for the gov- ernment and restaurant owners to examine even deeper the solution deemed necessary to render the restaurant sector more feasible and more important to demystify the public outcry that poverty is on the increase. The studies concentrate on the effectiveness of the pensions sys- tem and on the VAT rate charged in the food and beverage sector. To ascertain if there is a relation between poverty and the current pension system in Malta, PKF cir- culated a questionnaire to a sam- ple from a population of respond- ents whom we encountered live on the streets and by visiting three government owned old people's homes. The main purpose for this questionnaire was to shed a light on the controversial aspects of poverty, identifying the undulat- ing trends of personal expendi- ture and to investigate that part of the population, aged 65 and over, which is usually identified as more at risk of suffering from social ex- clusion or low income. Quoting Scott and Marshall, poverty is defined as "a state where an individual or a group of peo- ple lack the sufficient resources to maintain a healthy lifestyle or even lack the necessary means to achieve a standard of living which can be considered as being suit- able in a particular society". The first noteworthy observa- tion from the results of the survey is that almost 70% of the sample shows that households rely ex- clusively on a single pension. In- vestigating respondents' replies concerning their ability to save money while having only a single source of pension income resulted that more than half of all respond- ents do not succeed to save for any unexpected illness or a future holiday. Pensioners from nursing homes generally complain about low in- come, that they do not have any other sources of income or do not receive any contributions from relatives or friends. Lack of saving is identified as being a drawback. Naturally having a nest egg means not running out of finances when unforeseen events occur, indica- tive of a traditional aspect of Mal- tese culture – 'save for a rainy day'. When evaluating pensioners' comments on the pension system these were positive overall, but in some cases they cannot afford to go to any events, concerts or museums. Due to this constraint, pensioners feel detached from society. Social participation is an important factor, especially in old age and should be constantly supported by the family and the community, especially critical for those who suffer from low self- esteem. Another observation is the in- iquity of gambling in a desperate step to try and earn money. The respondents were asked to indi- cate the medium monthly amount gambled, revealing that about 30% of the sample gamble more than €100 in a month and do so more than once a week. If they couldn't afford to go to cultural events, museums or res- taurants, maybe the problem does not lie completely in the pension system? It might be a problem of the gambling habits, or the rising cost of healthcare and incidence of unsupported illness that is creep- ing up. Changing the subject of poverty and going into the alleged finan- cial problems faced by the restau- rant sector, the study encountered difficulty when requesting data from the Malta Hotels and Restau- rants Association, MHRA, or even individual members to disclose trading patterns. The MHRA wel- comed the initiative to throw light on the restaurant sector but most surprisingly demanded a fee as a pre-condition to endorse it. A request for support from a leading local bank which officially sponsors the MHRA to conduct regular hotel studies went unan- swered. Notwithstanding, PKF went ahead with its drive to try and expose the true causes con- cerning alleged VAT undeclara- tion and low payment to serving staff, particularly those coming from non-EU countries. Talking about food and bever- age services, the highest rates are in Croatia, Denmark and Norway – 25%, the lowest Luxembourg – 3%. Greece during its difficult financial period had started an experiment to attract extra ca- tering business by reducing VAT from 23% to 13%. This proved useful and official results indicate lower undeclarations. According to macroeconomics mainstream reducing the VAT rate would, in general, generate a number of out- comes that can help the economy to grow in higher terms. There will be a cost due to lower tax revenue but this is superseded by the multiplier effect. But what happens if the VAT reduction is not transferred to consumers through a lowering in menu pric- es? In a market where margins are very competitive operators may opt to use the reduction in VAT to augment their profits. This option looks very realistic. Moreover, there is no constraint of demand increasing through reducing pric- es, because competition in the res- taurant sector is already in sort of market equilibrium. Some diners complain about the quality in food and service – which is dwindling. There is a general consent among operators to use the decrease in tax costs to improve the quality or reinvest in the restaurant for improvements. It goes without saying, if the gov- ernment in the next budget ac- cedes to reduce the rate to say 13% one can expect an improvement in the catering margins leading to an improved image of the sector and of Malta's tourism in general. There is a counter argument that states that if the island, through higher standards, is able to attract richer tourists, who are looking for quality rather than low prices, this would generate an exemplary result in the GDP level. Another possibility which is not to be un- derestimated is the impact on the black market. It is a known fact, the black market exists every- where and empirical studies show that lowering of tax reduces its in- cidence. In conclusion, there is scope for more support to encourage con- sulting firms to undertake a deep- er examination of the incidence of poverty and the aforementioned alleged tax evasion. PKF Malta welcomes any support to under- take further studies. Copies of the two studies can be obtained by calling Myriam Pace on 21484373. Replies about whether they save money while having only a single source of pension income, showed that more than half of all respondents do not manage to save for any unexpected illness or a future holiday