The Malta Independent 23 May 2024, Thursday
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Not fair to tax Cola adjustment

George M Mangion Sunday, 4 June 2023, 08:39 Last update: about 13 months ago

The man in the street regularly watches announcements on state TV about a healthy economy and a recovery in tourist industry - now firing on all cylinders - all dancing to the tune of low unemployment levels.

It sounds all hunky dory, when other European states continue to register high unemployment and street riots against laws increasing the retirement age by two years. However, the sound bite from the plebs is that the gap between those making good money (proverbial 1%) and those at the bottom is growing - despite the feel-good factor of generous state handouts. 


The question that surely arises then, is: why is the poverty level (real or perceived) on the increase? And can we sit down and take a more holistic approach to the incidence of poverty.

We were showered with positive signs of an economy which the prime minister sung for us in his New Year's forecast. But serenity does not flow in a country where bad road design is leading to two weekly deaths from car accidents.

Most blame the complete disregard for importation of ICE cars which adds to congestion, pollution and frayed tempers. Environment is now included under the new ESG rules; yet few companies bother to understand the extra cost to achieve a good ranking on their Balance Sheets. Banks are reluctant to be seen motoring the ESG (environment, social and governance) hallmarks that will be launched on medium-sized companies. Another national malady is the upskilling of workers.

As state regulators and business development agencies are accountable to Castille-appointed experts, the level of professionalism dropped (evidence the Grey Listing). Apparatchiks lording Castille take every opportunity to recruit their wives, place nieces in top jobs as advisers, persons of trust on a gallop, not excluding family acquaintances - all on the gravy train.

The latest novelty is how an ex-prime minister was paid €11,000 monthly for giving consultancy to a loss-making company selling exotic birds. Parrots and toucans now camouflage dirty consultancies with their colourful feathers. Inflation is also rising its ugly head.

Malta is an open economy and importers are adjusting upwards prices of basic items blaming imported inflation. It is a sign of the times that the good old 10 years with zero interest rates are over and banks are even resizing mortgage repayment terms. Another headache is the massive leakage of early school-leavers who gained no formal education and still expect to earn a decent wage (not easy when digitisation and AI is de rigueur).

Nowadays, untrained workers are facing new challenges, with employers demanding higher technical qualifications to meet rising competition and digital competency. Worker Lobby groups complain that minimum wage is too low to sustain a breadwinner, unless he/she does three jobs on the hop. 

Others maintain, that if the minimum wage goes up even slightly, then hospitality sectors making heavy use of low-skilled workers (mostly TNCs) will report reduced profits and start shedding workers. A higher cost of wages is therefore counterproductive and in fact, adds to poverty levels. The Chamber of SMEs objects to further unsustainable increases in public expenditure resulting in millions of euros wasted on direct orders and a lax control over state procurement and capital projects. Government registered a deficit of €981.1m in 2022, equivalent to 5.8% of the gross domestic product.

According to statistics compiled by the EU, Malta ended 2021 with a deficit of €1.2bn, equivalent to 8% of GDP. Can we ignore the national debt burden (as interest rates creep up) partially reflecting generous pre-election state handouts (no accretion of permanent assets), sometimes to wean zombie companies which were on death row and beyond recovery? So far, no NAO study has ventured to discover how much of this largesse was sunk in ghost entities. Yes, our €400m daily subsidy of energy and grains is a non-discretionary policy (meaning the rich benefit equally as the poor).

Hands on heart and one cannot but sympathise with the situation of a cash-strapped government (recently more pennies from Heaven were cheques to over 200,000 citizens as a tax refund). Hence, there is no rationale of taxing Cola supplements. Recently, the finance minister is seen pulling strings from big spender departments to trim the deficit. He moans that only 30% of registered companies declare a profit. So where is the true justification for a national tax refund? Unless it is sugar coating voters for pangs of higher cost of living.

The Commission is concerned at the mounting deficit and wants to curb the massive €400m energy/food subsidies. This is to be used to lower national debt. Notice how, petrol and diesel at the pumps will double overnight. At street level, Castille bigwigs, some with their snouts deep in the trough, may not have the data how to identify the people most in need. Permit me at this juncture to go back in history and remind readers about unprecedented social reforms introduced by Otto von Bismarck, the German chancellor.

He created the world's first modern welfare state. The innovative system, as introduced, was conceived as an insurance against the woes of hardship, rather than as a natural entitlement. Those reforms created a hallmark for developed countries' modern welfare systems: a mix of unemployment benefit, health-care provision, universal education and state pensions. This movement led much of the developed world, to raise minimum wages matching inflation (as Malta did in the last budget). But economists warn that minimum pay can only rise so much before employment suffers.

Rising labour costs encourage firms to look for labour-saving alternatives such as robotics, this might do good for GDP, but as stated above, would exacerbate the shortage of jobs for less-skilled workers. Observers notice the hidden hand guiding a strong influx of foreign workers during the Joseph Muscat L-Aqwa Zmien, which on its own must have been one of the consequences of a brief economic boom.

Prosperity came with a price tag. It is estimated that between 2012 and 2017 there was an increase of 13.5% of those at risk of in-work poverty; the categories likelier to be at risk were those composed of households with a single adult and dependent children. The galloping building sector produced a gentrification malady. This is kindled from an unbridled housing boom with escalating rents.

These social factors can be a curse particularly for tenants earning low incomes or having large families to sustain. In the end, rejoice - it is the Love Island. Apparatchiks partying in crystal chandelier halls at Castille are finely tuned to the sound of pink bells that ring melodiously as invited clubbers enjoyed the pigging, yet outside, the Xebbajtuna crowd persists, in similar gusto, against abuses.

Memory tells us, two years ago an angry crowd forced the Castille incumbent to resign. This time, we need more than a few jingles and bells to circle Jericho walls before forcing the edifice to crumble.

George M. Mangion is a senior partner at PKF Malta


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