Poverty trap – perception or reality

Ask the average person about poverty and he will tell you that it is a perception because TV announcements show a galloping economy firing on all cylinders with a healthy tourist industry and record low unemployment levels.

Tall sounds hunky dory when we read about other southern states in Europe which continue to register a higher percentage of job seekers. Yet, the sound bite from the Opposition is that the gap between those making good money and people at the bottom is growing and challenge the government on the true effectiveness of the feel-good factor. A dumb question follows – is poverty (real or perceived) on the increase? 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 economy?

It is true that we have not struck oil and there is no windfall to share, so the budget master cannot lavish goodies given the burden of accumulated national debt. The budget cannot hand out a golden jackpot in an attempt to plug all the 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. Surely empirical data can be gathered using independent surveys commissioned by MCESD to assess this phenomenon.

There are a large number of early school leavers who have no formal education yet are expected to earn a decent wage when today, now more than ever, this is becoming more difficult, as employers now demand higher technical qualifications to meet growing competition and increased digital competency. The Opposition complain that the minimum wage is too low to sustain a breadwinner (unless he/she does three jobs on the trot). Others maintain that if the minimum wage increases even slightly, sectors that employ a large number of low skilled workers will have reduced profits and start shedding workers. This is counterproductive and will in turn add to poverty levels. In fact, the media reported Finance Minister Edward Scicluna at MCESD saying that minimum wage adjustments will not directly improve poverty levels as many people who fall beneath the poverty line are in fact unemployed or pensioners.

It is a fact that changes in 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 argues that 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 in the weighting 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. It is not easy to persuade employers to jack up minimum wage unless this results in higher productivity to balance the consequences of reduced competition in export markets.

Is the generation of new wealth high enough that we can afford to be profligate? 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 low-income workers and pensioners. Caritas Malta presented the authorities with a study entitled “A minimum essential budget for a decent living”. This study focuses on three low-income household categories. A previous document on the minimum wage was submitted in 2012 but the 2016 study is not about the mini- mum wage, but was conducted with the aim of establishing an essential minimum wage for a decent standard of living. Briefly, this document says poverty is on the decline. It still persists, but it’s much less of a problem now than it was before 2012.

Caritas proposed that the minimum wage should increase gradually, while others argue that a 10 per cent increase over three years is overdue. The Opposition took this to mean that poverty is on the increase and is a strong indication that the government has lost its social conscience. Prime Minister Joseph Muscat and Alternattiva Demokratika have both reacted positively to Caritas report which found that the minimum wage needs to be studied as without corrective action it may lead to poverty. The prime minister encouraged all stakeholders to reach a consensus at MCESD and come up with suggestions by the end of next month.

The Nationalist Party said: “The most troubling thing about this report is that the rising cost of living is affecting the poorest far more than the government‘s official statistics suggest.” As can be seen there is consensus between the two political parties that something needs to be done to alleviate the pangs of poverty on low-income earners or those chronically unemployed. By contrast, in 2015, the UK Chancellor of the Exchequer George Osborne replaced the minimum wage for workers over 25, with a National Living Wage. This meant that those earning a minimum wage had a pay increase of more than 10 per cent. But the increases are not going to stop there. Osborne also committed the government to raising the minimum wage, by 2020, to 60 per cent of the average salary. Now, under the Brexit administration, such promises may change. In the UK, the government spends about £30 billion a year topping up wages via tax credits, but for the private sector the overall effect of raising the minimum wage will be employers having to bear much of that burden. The Caritas study was based on a methodology that used three types of family structures. This included a couple with two children living on one minimum wage having a budget of €11,446. A family including a single parent with two children had the minimum budget established at €9,197, and an elderly couple aged 65+ with a minimum budget of €6,527.

In the Caritas study, one may be surprised to note how the cost of living fluctuates while current inflation is modest. In 2012 it registered a 16 per cent increase in food items and the recommendation to increase the minimum wage was not considered favourably by the Gonzi administration. One has to take into account that in 2012 the economy had high annual deficits (over three per cent of GDP) and shortly afterwards the Commission had issued a warning that unless remedied it was about to place the country under an Excessive Deficit Mechanism, so realistically wage adjustments had to wait. To conclude, it would be appreciated if the Competition authority comes to the rescue and carries out independent studies to gauge the effect on competitiveness once minimum wages are adjusted upwards. It is also important to measure the true incidence of low-income workers, including the unemployed and pensioners susceptible to sliding into the pernicious poverty trap. Once workers slide deep into the abyss, it is hard to hear them sing the praises of an economy firing on all cylinders. Prompt action is needed.