No hint of discussion yet on revision of COLA mechanism

No discussion has taken place – and there is as yet no hint of when it will start – on the planned revision of the Cost of Living Adjustment (COLA) mechanism, which is deemed necessary, in particular by employers, after the record rise announced in the last Budget.

The weekly COLA that has started to be given as from 1 January was an unprecedented €9.90 per week, up from the mere €1.75 at the start of 2022. In the weeks leading to the presentation of the Budget for 2023, there had been talk of a need for a revised system, so as not to burden employers when it is too high and not disappoint workers when it is too low.

But, as 2022 made way for 2023, social partners, who were spoken to by The Malta Independent on Sunday in the past days, said they have no idea when the subject will be on the agenda of the Malta Council for Economic and Social Development (MCESD).

The COLA increase primarily addresses rising inflation, with employees being given a weekly rise based on the price of a pre-established set of products and services. The increase is given as from the following year, based on the inflation of the previous year, which is already in itself a fault in the system. Added to this, when the COLA is high – and, this year it’s a record increase – it is bound to cause a ripple effect as businesses try to recoup the extra funds they spend on increased salaries.

Discussions on the COLA mechanism ran rampant in the months leading up to the Budget, as it became increasingly clear that the COLA for 2023 was to be the highest ever. The government’s decision to absorb the rising cost of energy and fuel kept the COLA below €10, with Finance Minister Clyde Caruana at one point saying that it would have been €25 per week if the government had not intervened in the energy sector.

Employers and unions had drafted their own pre-Budget documents with proposals on how the mechanism could be revised.

The Malta Employers Association (MEA) had then warned that due to the expected high COLA, more than half of the companies would be negatively impacted. Director General of the MEA Joseph Farrugia had said that he wanted to see an agreement being reached by all stakeholders for a minimum and maximum COLA to be established before the 2024 Budget is presented.

Three months have passed since the Budget for 2023 was presented and nothing has happened since. Farrugia told The Malta Independent on Sunday this week that there are currently no discussions being held with the social partners.

He said that the MEA had suggested that the COLA mechanism is amended; to achieve a balance in case inflation continues to skyrocket.

“What we were proposing was a stabilisation of the mechanism. The mechanism can remain as is, while adding a five-year minimum and maximum COLA adjustment,” Farrugia said.

He said that a large fluctuation in the COLA, alluding to the sudden increase from €1.75 to €9.90, causes damage for the employer, as well the employee.

The General Workers’ Union (GWU) also confirmed that since the Budget there have been no discussions on a possible revision of the mechanism.

GWU media officer Michelle Lia said that an initial discussion had started before the 2023 Budget but since then, no developments were registered in this regard.

During the same period, the four trade unions at the Malta Council for Economic and Social Development (MCESD) met with the Ministry of Finance to discuss the payment of COLA and the relativity between grades within the public administration and public sector employees, Lia said.

“As the GWU, we already discussed internally various scenarios/mechanisms/factors that could improve the same mechanism or introduce a new one. We also met informally with other social partners to discuss and exchange ideas,” Lia said, adding that this year, the Low Wage Commission as per the agreement reached in 2017, must present its findings.

Lia said that since the introduction of the Income Policy in the 1990s, it was always the employers that pay the COLA and it never changed. She pointed out that apart from the fact that employees receive the increase the following year, this is an adjustment to keep their purchasing power.

“The same mechanism awarded both a €0.58 cents COLA when inflation was low and €9.90 when the inflation was high. One of the proposals is that there is a fixed minimum and fixed maximum, but this still needs to be discussed,” Lia said.

Finance Minister Caruana had said that the increase in COLA would have been greater than €10 a week had government failed to cushion the increase in energy prices. Asked about this, Lia confirmed that through an internal study done by the GWU, if the energy and fuel prices were not cushioned, then the COLA would have been around €23.

The COLA mechanism is sustained by the Household Budgetary Survey, which is conducted among private households and reveals changes in consumption trends among Maltese households over a number of years.

Lia said that one of the primary objectives of the survey is the utilisation of data as an updated basis for the Retail Price Index (RPI), which measures changes in prices and which is an important indicator of the impact of inflation on family budgets.

“The items of consumption varies and changes according to the household exigencies and patterns,” she said.

One factor that could be delaying the start of the discussion on the revision is that the MCESD is set to have a new chairman.

The president of the Malta Chamber of Commerce Marisa Xuereb also told The Malta Independent on Sunday that there has been no formal discussion on the suggestions several social partners put forward over the last six months.

Xuereb said that it is imperative that a new chair for the MCESD is appointed within a reasonable timeframe and that whoever is appointed enjoys the confidence of the members of MCESD.

She said that the MCESD has a very important role, particularly in challenging times like these where policies and strategies are bound to be more successful if they draw on informed and constructive social dialogue.

The last MCESD meeting was held in mid-December, Xuereb said.

Xuereb pointed out that the main concern with the current COLA mechanism is that in times of high inflation, as we are experiencing, it can trigger a wage-price inflation spiral.

“While it is a fact that the government’s strategy to maintain stable en

ergy prices has helped to keep inflation below the European average, we are exposed to imported inflation and we have a high rate of inflation in services compared to most other European countries,” Xuereb added.

She said that the latter is fuelled by labour shortages and the resultant wage increases that private sector employers have had to contend with to retain employees or attract new ones.

Xuereb said that there are signs that inflation in Europe will slow down this year, in response to higher interest rates and some mitigation of energy price increases in various countries.

She said, however, that Malta is bound to be impacted by the substantial COLA increase in the first quarter of 2023.

“We hope to see some calming down of imported inflation starting from Q2 to cushion some of the impact of higher payroll costs,” Xuereb said.

Xuereb said that the main concern is Malta’s competitiveness relative to other countries.

“If our labour costs increase faster than those of competing countries, we will struggle to maintain market shares in cost-sensitive sectors such as tourism and manufacturing,” Xuereb said.

She said that sectors such as financial services and IT are also becoming much more cost-sensitive than they used to be.

“Reducing undue bureaucracy and becoming more efficient at what we do, while maintaining high levels of transparency, accountability and good governance, will be key to improving our competitiveness in these sectors,” she said.

Another major challenge is the retention of skilled workers, as other countries seem more attractive particularly in terms of providing routes to long-term settlement, Xuereb pointed out.

“A high rate of employee turnover has a direct impact on our productivity, the quality of our products and services and our ability to generate higher value added and move up the value chain,” Xuereb said.