After the largesse, expect hidden taxes to balance debt

The euro has struggled to find its footing in recent weeks amid mounting speculation that the region's slowing economy can't withstand further interest-rate hikes. That's fuelled chatter that the currency could once again fall to parity with the dollar. Blame inflation as the main culprit. Last December, average inflation in the eurozone dipped under the symbolic figure of 10.9per cent.

Recently in the euro area annual inflation rate was down to 4.3% in September 2023.  A year earlier, the rate was 10.9%. However, a recent report explained that "real wages are substantially lower than before the pandemic" in 2019 because inflation has eroded consumption power. Turning to the services sector, this is experiencing "serious labour shortages" yet in order to survive this malady, it stood steadfast approving pay "above pre-pandemic levels".  As can be expected analysts hoped the inflation rate in the single currency area to drop again.

Back home, the persistence of high inflation remains the most significant risk, as many economists believe the targeted inflation rate of two per cent is unlikely to be achieved in 2023/4. The impact of the generous subsidies on energy and food prices has been beneficial resulting as the main reason why Malta’s core rate of inflation is one of the lowest in the EU.

Castille reminds us that Malta’s economy remains resilient together with a vibrant labour market. Unemployment remains at record lows and well below European averages. As at 2021, Eurostat figures show that the unemployment rate in Malta stood at 3.5% (compared to the EU’s average of 6.4%), being the third lowest rate reported following Czech (2.8%) and Poland (3.4%). Now it registers 2.9% or 8,000 persons.

However, a disparity within labour statistics is evident. For example, data published by the Labour Force Survey indicates that as of the second quarter of 2022, 8,446 people were unemployed yet statistics from the NSO show that for the first time in many years, unemployment in Malta has dropped to below 1000 people.  As can be expected politicians prefer using the lower statistic. The stark difference is due to the anomaly that there are thousands of unemployed workers who prefer not to register with JobsPlus.

Another aspect worth analysing is the potential economic implications of the COLA (Cost of living adjustment) on the labour market. This will result in an estimated 2% increase in our cost base” explains Nick Xuereb CFO Toly group, who estimates an impact of roughly €1,000 per employee, once wages, social security and overtime rates are considered. Inflation in the past months has led to the social partners to concur that the COLA for next will be €12.81 weekly.

Charles Borg CEO, PG Group says that COLA has been with us for a number of years now and it has served us well in the past, however, our economy has evolved and therefore this mechanism needs to be revised to be more relevant to the new economic reality of today.

As a general comment, exporters argue that unless appropriate measures are undertaken so that productivity improves, this higher-than-normal COLA may potentially lead to a wage-price spiral. The latter, refers to a vicious cycle where workers demand upward wage reviews due to increasing inflation (in this case, through the COLA), such that employers continue to offset higher labour costs by raising their prices.  Such a series of events would lead to a negative feedback loop, adding to the existing uncertainty and tension in the economy.

The Malta Employers Association carried out a survey among businesses, finding that 55% of respondents feel that the COLA rise will affect their competitiveness.  Ideally, the measure should be discriminatory with the allowance targeting low-income groups and all those employees who have not received wage rises during this inflationary environment. For example, government has not announced itself to pay COLA to its bloated payroll of circa 51,000 employees, arguing that part of this increase is already covered through collective agreements.

Private sector may try to cut down their headcount in 2024 to be able to pay higher wages or be tempted to engage more TCN’s paying lower hourly rates.  An obvious result is a persistent increase in cost of living and thus an even higher COLA.  Some importers predict this may possibly trigger a spiral for an even higher cost-of-living, hence rendering the COLA ineffective.

As a result, a wage-price spiral would be deleterious should this high trend persist in the coming years.  Appropriate policies are hence crucial to mitigate the possibility of such wage-price spiral.  In mitigating inflation growth, policy makers at Castille, can resort to either fiscal or monetary policies. Monetary policy is undertaken by the Central Bank (according to ECB guidance) although resilience efforts and economic headwinds will constrain their ability to do so.

Malta’s own inflationary environment can be attributed to a combination of the significant increase in money supply growth. During the pandemic, many recall the unforeseen rise in raw material costs, higher cost of production. Party apologists claim Castille is limited in its spending capacities, such that it preferred to not improve domestic demand by improving spending power. This can be a result of reducing indirect tax (so far Castille refuses to trim vat on catering).

The prime minister is feeling confident preaching to party faithful, saying Malta is the fastest growing in the EU. He is proud about the policy of resorting to direct subsidizing energy (read Enemalta and possibly Electrogas) in a non-discriminatory way. Many agree this will undoubtedly lead to waste (the rich sail luxury yachts, keep heated swimming pools and afford 500 horsepower V8 engines).

In sharp contrast, most countries urge their citizens to economise on their energy. Ideally Castille designs discriminatory subsidies to benefit pensioners, the poor and low-wage earners. Note the largesse in the budget, when next year over €47 million are to be issued cheques to all, aged over 16 years. A smart move, as it boosts internal commerce not forgetting next year is a landmark MEP election.

In conclusion, these are troubling times with global uncertainties such as the relentless Ukraine invasion, Hamas attack in Israel, and a decisive election next year in US.