Is the COLA mechanism defeating its purpose?
In a recent event, the Minister for Finance and Employment, Clyde Caruana, stated that the private sector needs to be the driving force that brings about change and leads the country’s economic direction. Government, on the other hand, needs to support that change. I couldn’t agree more. The challenge, however, is to go beyond rhetoric and have this reflected in practice.
For far too long, businesses have been lumped with pressures and burdens that are squeezing profitability and disincentivizing further investment. From Malta’s grey listing and reputational collapse to the pandemic, the war in Ukraine and resulting inflationary and supply chain issues, the lack (and quality) of human resources, political and diplomatic uncertainty, inflation, the banking situation, bureaucracy and the ever-growing compliance and regulatory obligations – I could go on and on.
On top of all of this, employers have now been burdened with an imposed wage increase of Euro 12.81 per week, per employee. An increase of nearly Euro 700 per employee, in addition to the record increase granted just one year ago. One may argue that COLA is a mechanism set on a fixed formula intended to compensate for inflation and that has been in force for so many years. But I do encourage us to look beyond the convenience of the status quo.
Ironically, whilst the COLA mechanism is intended to compensate for inflation, the chances are that increases of this magnitude will contribute to even greater inflation. Ultimately, unless businesses simply give up, they need to seek to make this work and balance the books. They will logically do so by shifting this increase on to consumers through a revision of their pricing, thus, contributing to further inflation and defeating the purpose of the mechanism. Worse off, the victims of this snowball effect are the lower income earners that are struggling the most. This brings me to my next question: how socially just is the current system to grant a straight-line increase, across the board and regardless of the employee’s salary level? An employee earning the minimum wage will get the same increase as the CEO of a publicly listed company netting a Euro 250,000 annual salary. And let’s face it, how will Euro 50 per month effectively help someone on the minimum wage to cope with the huge increases in the cost of living? And what difference will Euro 50 per month do to someone earning a high salary? Social justice and common sense require a mechanism that would grant greater increases to lower income earners, lower increases to higher income earners and, if need be, no increases to very high-income earners. We do need to be clear on the underlying economic and social impact of these mechanisms and the ensuing increases.
We also need to keep in mind the low and unrealistic COLA wage increases of the preceding years, that were not fairly compensating for inflationary pressures at the time. This indicates that the current mechanism had previously failed to account for inflation, which was evident in the steep and consistent increases in the cost of property. The current COLA mechanism is giving us extremes that are disruptive, insufficient, and unsustainable for all stakeholders. The current mechanism is crying for reform.
The announced COLA increase for 2024 represents a huge financial burden on businesses and employers. The critical role of business within the economic and social development of society is a reality that one cannot deny. Regardless of their size or scope, businesses are the community at work. Businesspeople create goods and services to sell to their community, and possibly beyond. In doing so, they take risks, generate employment opportunities and, hopefully, make a profit within the obligations set for them by society. That profit is essential for the sustainability of business and employment. Profit is required to offer investors a return on the risk they took and incentivise them to invest and risk further. Profit is necessary to allow for employment generation, career and skill development, and improved salaries for employees. Profit is required for businesspeople to re-invest, innovate, and create. Profit is also necessary for businesses to pay taxes and other contributions to Government. In other words, business is crucial to wealth creation in society and, without profit, there is no business. One must therefore be careful not to burden businesses with more than they can sustain, as the result could be catastrophic for all stakeholders, particularly employees!
To give the impact of this increase some perspective, the COLA increases of the past 2 years represent an increase of circa Euro 12,000 for a micro enterprise employing 10 people, an increase of circa Euro 36,000 for a business employing 30 people, an increase of circa Euro 71,000 for a business employing 60 people, an increase of circa Euro 120,000 for a business employing 100 people, and an increase of circa Euro 360,000 for a business employing 300 people. These increases are placing huge financial pressures on businesses, and this is even more critical in the case of businesses that are still recovering from the impact of Covid, businesses that are directly or indirectly hit by the steep increases in costs, and businesses that are simply not doing well. Business is not always profitable and this is one of the risks that investors take! This COLA increase is a direct hit to businesses’ bottom line, serving as the perfect disincentive for businesses and businesspeople to invest, at a time when we need it most. Therefore, whilst I acknowledge that making changes to the mechanism isn’t as straightforward as saying it, we do need to have this countered with initiatives that will support businesses and incentivize investment. This can be done in various ways, with the most obvious taking the form of investment grants, tax credits and tax cuts that can support business cash flow and incentivise investment. Alternatively, Government can carry the weight with businesses and subsidise part of the proposed increase. Considering the current contextual conditions, much more would have been expected from the budget in this respect.
Beyond the COLA mechanism, Government also needs to consider inflation at a macro level and have strategies in place to ease and manage such pressures in the longer term. Whilst international forces and events are significantly contributing to inflation, I dare say that populist policies and schemes introduced over the past decade have considerably contributed to a price spiral that is now much harder to control and stabilise. Policies and schemes introduced within the property development sector and their resulting impact on property prices are a very clear example of this.
Finally, I also call on the social partners to voice these concerns and use their authority to influence positive change. Organisations like the Malta Employers’ Association, the various business chambers and employee representatives need to come together and rally behind the principles that support the critical role of business within the economic and social development of society, and the wellbeing of our people.