Adhere to economic principles and avoid setting Malta on ‘path of implosion,’ Malta Chamber warns

The Malta Chamber of Commerce, Enterprise and Industry has urged policymakers and decision-takers to avoid disregarding economic principles in the fight to battle persistently high inflation rates.

In a statement released on Tuesday, it said that due to high inflation, it is “imperative” that Malta finds ways of improving the purchasing power of lower income groups “without fuelling a wage inflation spiral across the board”.

The statement comes after Prime Minister Robert Abela over the weekend said that the minimum wage is currently too low and “must increase”. He confirmed that Government is in discussions with social partners to “revise it upwards”, before expressing confidence that they will lead to a “satisfactory result”.

The Chamber emphasised that presently, discussions with social partners should be centring around how to counter inflation. “For as long as a large enough portion of the population can still afford to pay more for services, any increases in costs, including wages, will result in an increase in prices, and low income earners will find it even more difficult to keep up,” The Chamber said.

Additionally, increasing wages across the board without corresponding increases in productivity will see Malta’s competitiveness on exports being “eroded and lost”. This will have the effect of encouraging larger exporters to gradually shift part of their operations away from Malta to more competitive locations, shedding jobs in the process. “Make no mistake here, the first jobs to go are always the lower-level ones, the ones of the very same people some naively think they are helping by artificially increasing minimum wages,” it continued.

The Cost of Living Adjustment (COLA) is a mechanism that was specifically introduced to assist workers and help them cope with rising living costs, especially when it comes to the cost of essential goods and services. This was set at €9.90 in 2023 and ahead of next year’s Budget, it is forecast to reach €13. The Chamber said that this is a “significant” increase that is “not being matched by productivity increases”.

It also referred to another mechanism introduced in 2017 which saw increases of an additional €3 per week per year in the minimum wage payable to employees in the first two years of employment. Together with COLA, this mechanism has “safeguarded the income of minimum wage earners in steady employment and ensured that they do not stay on the minimum wage for long”.

These measures have prompted Malta to have the lowest percentage of full-time workers on minimum wage in the European Union (EU).

The Chamber remarked that performance-based pay through commissions, production bonuses and performance bonuses, are a “significant component of pay packages” in the private sector. “This incentivises improvements in productivity which we so badly need to remain competitive, this is what policymakers should be focusing on. Basing policy considerations strictly on basic pay grossly underestimates both labour costs for employers and take-home pay,” it added.

Malta’s inflation rate has been kept within the EU average primarily through a “blanket, full subsidisation of energy costs”, and should energy be excluded, it is “substantially higher” than the EU average, particularly in services, The Chamber said.

This is a result of Malta’s very tight labour market, requiring employers to pay higher wages to employ and retain workers, and on other occasions go for less qualified workers. These are two situations that prompt wage inflation, with the latter doing so as the employer is getting “much less value for the same pay”.

“Piling more artificial increases in wages on top of all this will fuel the inflation spiral even more,” it stressed.

This is primarily why Finance Minister Clyde Caruana earlier this year warned that the inflation rate “has a long time before returning to the levels of around two per cent we had become accustomed to in the past”. This is in contrast to other countries, which have hope that inflation will be tamed over the coming years.

Malta’s inflation rate dropped to four per cent in August, its lowest level since January 2022, the National Statistics Office reported last month. The highest annual inflation rates during the month were registered in food, while the lowest were in transport and communication, as well as clothing and footwear.

The Chamber highlighted that inflation will not ease if “policymakers and decision takers ignore fundamental economic principles and put our country on the path of implosion”.

“Increasing minimum wages is not a silver bullet. The risks of fuelling higher and more persistent inflation are high,” it added.

Certain countries across Europe increased their minimum wage in 2022, yet they were then faced with a recession in 2023 that has pushed “struggling companies in many sectors to cut down jobs”.

“The world is extremely unsettled, and we need to proceed with extreme caution because we can never guess what the next adverse development will be. In such circumstances, committing to a series of wage hikes over the next few years will accelerate inflationary expectations and restrict our policy responses to potential future developments. It is naïve at best, suicidal at worst,” The Chamber continued.

In this respect, it called for Government to revise the lower income tax bands to ensure that the increases in minimum wage that came into force since the start of the inflation crisis in 2022 are “fully tax exempt”, thus assisting low-income earners and avoid fuelling inflation further.

“It does not make sense to compensate people for increases in the cost of living through COLA, only to divert part of those increases to Government coffers,” The Chamber said, before concluding that “all social partners”, whether representing employers or employees, are in agreement with this.