Prime Minister Lawrence Gonzi and finance minister Tonio Fenech are facing a clarion call from the business community for a serious rethink on effecting the cost-of-living adjustment (COLA) in this year’s Budget.
The cost of living adjustment is set to cost employers a staggering €38 million at a time of economic crisis, and the business community is arguing that jobs are at risk in strategic sectors such as tourism and manufacturing. Such was the stark warning of the Malta Employers Association, after Tonio Fenech announced that government was not intent on making any changes to the legal mechanism that triggers a cost of living increase for workers, to compensate for inflation during the previous year.
People like Joe Farrugia, the MEA director, argue that efforts have been made this year to safeguard jobs. But this accomplishment risks being thrown out of the window if companies are made to increase their wages for what is clearly government-induced inflation.
Employers have had to face up to the reality of 2009, in which orders and exports went down drastically, while costs – most notably from the hike in water and electricity bills – have been increasing. Farrugia’s warning is that unemployment is set to increase if the COLA is not amended.
According to the findings of a survey this week, the MEA projects that 20% of companies can be expected to cut jobs if the COLA ranges between €5 and €7 weekly in 2010. As the MEA survey shows, employers listed a reduction in utility tariffs and revision of tax bands as priorities – a sign that government must do more to manage inflation, which is persistently higher than in other eurozone countries. Logically, COLA will spur further inflation. Like the effects of the utility hike, it will lead to firms shutting down or shedding workers.
For these reasons, the MEA is calling upon government to intervene by issuing part of the COLA as a bonus that will be paid by the government, and that for 2010, assuming a COLA of €5.80, €3.50 will be paid for by the employer, and the rest – €2.30 – will be paid by government. Farrugia says the arrangement would provide a “slight breather” to companies and help them retain jobs until the economic upturn.
This proposal will be a difficult test for Lawrence Gonzi. This year, businesses have had to face up to higher costs, mainly exacerbated by the hike in utility bills, but also higher fuel bills and proposed increases in commercial rents due to rent reform. Businesses rightly feel that they should not be made to compensate fully for a rise in the cost of living that was directly influenced by the government itself.
Politically, the stakes are high. In this time of recession, governments are expected to provide stimulus to the economy. With the election a good four years away, Gonzi may be prone to let the business community slog it out on its own. He might choose to call the employers’ bluff: several economists will advise him that it is not the COLA that businesses should fear, but the pressures for wage increases from the unions.
In accepting a revision of COLA, he will have to face the unions’ wrath. Going by the statements of his finance minister, it looks like an unlikely option. But there is no doubt that the government must get back to the drawing board, especially in a bid to hammer out a much-desired social contract.
On this aspect, the social partners are already holding informal meetings between themselves in a bid to reach an agreement on positions to be forwarded to government before next month’s budget. It is the first time social partners seem to be working together since the collapse in talks over a proposed pact in 2005. But it is also true that trade unions will be adamant on their position that workers cannot be left to face inflation without any compensation.
But the prime minister will seriously have to consider his government’s economic priorities. Alienating the business community at this point will usher in a series of accusations on its recurrent expenditure. While he faces a deficit of €370 million at end-July, after passing on €21 million in electricity and water costs to consumers, Gonzi still toys with an €80 million project for a new parliament.
In a drastic move to improve its own revenue shortfall, the finance ministry is now embarking on an amnesty for 95% of accrued interest and penalties (in some cases) on €600 million in income tax arrears. Arguably, it may be just one of the few ways for government to recoup this gaping hole in its finances; but there is no doubt that honest taxpayers will see the amnesty as an insult to their sense of justice.
Budget 2010 will be a moment of reckoning for Lawrence Gonzi. He may choose to steam ahead with unpopular reforms. But without a clear plan to inject a much-needed stimulus for Malta’s staid economy, the future will be as uncertain tomorrow as it is today.
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