A di­chotomy – a vi­brant econ­omy ver­sus peo­ple in poverty trap

Malta Independent - - BUSINESS & FINANCE -

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 gmm@pkf­malta.com 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.

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