A dichotomy – a vibrant economy versus people in poverty trap
Mr Mangion is a senior partner of PKF an audit and consultancy firm, and has over 30 years experience in accounting, taxation, financial and consultancy services. He can be contacted at firstname.lastname@example.org or on +356 21493041.
The PN accused the Prime Minister of having lost interest in addressing the challenge of poverty. But Edward Scicluna, the minister of finance disagrees. In a video posted on MaltaToday, he remarked, “The first risk is that expectations start increasing: people demand they take a share from the growing wealth they see around them. The problem is how income will be redistributed, and how to tackle poverty and equality.” In addition, Prof. Scicluna spoke candidly about the sensitive topic of poverty explaining that it can be of two types – absolute and relative.
His budget is expected to fight absolute poverty with a number of new measures (mainly single parent families), but he admitted that slashing relative poverty altogether can be illusive. Relative poverty can be the result of new affluence that inherently creates two classes – the haves and the have-nots. This can be explained by an example. Development of more luxury dwellings will automatically improve the standard of living but pushes upwards the price of housing (comparison of the former with lower quality social housing makes them look disadvantaged). This can arouse a secondary fear of a property bubble unless supply is matched with adequate demand from high spenders (mostly foreigners) who can afford to buy or rent luxury high rise condominiums.
On Net TV channel one hears the sound bite from the Opposition saying that the gap between those making good money and people in the bottom income bracketis growing and they chide the government on the effectiveness of the feelgood factor. Why this dichotomy? A vibrant economy should succeed in reducing the low earning cohort. Can we sit down and take a more holistic approach to the incidence of poverty now that we witness early signs of healthy growth in our economic garden. It is true that we have not struck oil (as no drilling concessions have been issued) and there is no windfall to share so we need to keep feet on the ground before the budget master can splurge goodies, given the burden of accumulated national debt. The next budget cannot indulge in giving a golden jackpot in an attempt to plug all holes in our social fabric. Really and truly an altruistic approach is called for to determine the number of people falling into the poverty trap – whether real or perceived.
Could this be attributed to the above average (compared to EU norms) early school leavers who gained no formal education and are expected to earn a decent wage when today, now more than ever, this is becoming more difficult since employers demand higher technical qualifications to meet rising competition and digital competency. The Opposition inists that the minimum wage is too low to sustain the livelihood of a breadwinner (unless he/she does three jobs on the hop). Others maintain that if the minimum wage goes slightly up sectors making good use of low-skilled workers will suffer reduced profits and may start shedding workers.
New data has been released on the subject as part of the Statistics on Income and Living Conditions (SILC) survey. This sheds some light on the poverty conundrum. The survey was conducted among the same sample of 4,300 people over four years and showed that 68,658 people living in private households, or 16.3 per cent, had an equalized income below the poverty threshold. The atrisk-of-poverty rate among people aged under 18 was 23.4 per cent. This rate stood at 21 per cent for persons aged 65 and over. On its part, the government said that 5,000 persons were no longer at risk of poverty.
Changes in the cost of living has been indexed on a basket of household expenses and the COLA mechanism automatically increases minimum wage to reflect any upward movement in inflation. The finance minister contends that, in his opinion, the COLA mechanism is a social contract that has worked perfectly for 16 years and there is no pressure to change it. The Association of Pensioners disagree saying that a revision of the content of the items used in the basket of household expenditure is overdue. Unsurprisingly, the General Workers Union (GWU) presented a proposal for an increase in the minimum wage but not across the board but by way of an additional top-up from the government. However, it is not easy to persuade employers to raise the minimum wage unless this results in higher productivity to balance the consequences of reduced competition in export market.
Is the generation of new wealth high enough that we can afford to be profligate? Not so fast. Experts advise that unless there are concrete signs of overheating in the economy there is no justification for higher taxes to compensate for generous welfare hand-outs to the strata of low-income workers, single parent families and pensioners. Caritas Malta recently presented the authorities with a study entitled “A minimum essential budget for a decent living”. This study focuses on three low-income household categories. Another document on the minimum wage was submitted in 2012.
The 2016 study is not about the minimum wage, but was conducted with the aim of establishing a minimum essential budget for a decent living. In a nutshell, the recent document says poverty is on the decline. It still persists, but it is much less of a problem now than it was prior to 2012. Caritas proposed that the minimum wage should increase gradually and the Opposition took this to mean that poverty is on the increase and that the government has lost its social conscience. Prime Minister Muscat said proposals for a gradual increase in the minimum wage and a study on income adequacy had been noted and he welcomed debate on these important issues. As can be expected there is no consensus among the two political parties on the conclusions of the study as each gave contrasting interpretations. None the less, one notes that while this Caritas report is based on studies that took into consideration novelties such as smart phones, it strangely left out important benefits such as free child care, no out-of-stock medicine, free tablets, higher ceiling for non-taxable income and in-work benefits which are important cost-saving initiatives introduced by this administration.
Taking a look at the 2012 Caritas study, one will be surprised at how the cost of living fluctuated. While current inflation is modest, in contrast, in 2012, it registered a 16 per cent increase on food items. In the 2012 study, the recommendation by Caritas to increase the minimum wage was not considered favourably by the Gonzi administration. One has to take into account that during the Gonzi administration, there was a time when the economy reported high annual deficits (reaching 3.7 per cent) and in 2012 the Commission had issued a warning that unless remedied it was about to place the country under an Excessive Deficit Mechanism.
To conclude, the survey points to the need of an upward movement in the minimum wage to match the facts about to be announced in the latest household budget survey conducted three years ago. With close to 70,000 people imperceptibly sliding into an unfathomable pit, we cannot blame these folks when they find it hard to sing the praises of a vibrant economy firing on all cylinders.