Malta needs a clear economic direction

Malta Employers Association president JOE FARRUGIA argues that – to avoid the danger of a ‘wage-price spiral’ - Malta needs to radically rethink its entire economic model

Malta Employers Association president Joe Farrugia
Malta Employers Association president Joe Farrugia

The MEA’s latest survey warns of a ‘wage-price spiral’: whereby inflation leads to higher wages; which fuels demand for more goods; which leads to further wage hikes, etc. Meanwhile, some foreign industries operating in Malta – ‘i-Gaming’ being a classic example – are able to offer disproportionately high wages, compared to Maltese employers. Given that these companies also benefit from a much lower corporate tax-rate, than the 35% imposed on local businesses: how much of an impact does Malta’s tax regime itself have, on this ‘wage-price spiral’ phenomenon? 

First of all, there are many factors contributing to the current situation. It’s not just about the tax regime.  

Bear in mind that different sectors of the economy have a different ‘value-added’; and therefore, some sectors which we have managed to attract to Malta, can offer much better conditions than others. This creates an element of competition in the labour market: we see many cases where public sector employees – even teachers, for example - leave their employment, to go and work within i-Gaming. And it’s the same for many other areas in the private sector, too. 

Now: there is a positive element to this sort of labour mobility; in the sense that employees try to seek the best opportunities for themselves... and rightly so. For this reason, I don't necessarily see labour mobility as a ‘negative’, in itself. 

What I do see as a negative, however, is when you have wage pressure, which is not commensurate with productivity. Let’s say, for example, that I run a manufacturing company. If my business suffers an increase in costs... what can the company do? It can either transfer that cost onto the client, in terms of higher prices – and by ‘clients’, bear in mind that we're not talking only about ‘consumers’. Clients could be other businesses; which also means that you could have inflation, running across the entire supply chain... 

Another thing the company can do, is absorb the cost itself... which could be conducive to lower productivity.  

Now: not all companies can just decide to ‘up and raise their prices’, from one day to the next. First of all, there is competition. Secondly, there is also ‘elasticity of demand’. It's not always the case that, when you increase your prices, sales will simply remain as they are. You could be operating in a sector where - if you put up your prices, even marginally - you might lose a more-than-proportionate percentage of your sales.  

Now: we have a system in this country, whereby there is an automatic wage-inflation indexation, through the cost-of-living adjustment (COLA). The COLA mechanism automatically grants a wage increase, which is dependent on the rate of inflation.  

Naturally, this has often been criticized in the past: by unions, when COLA is low; and by employers, when COLA is high. However, the mechanism itself is objective. I, personally, have never criticized the COLA mechanism. One can always criticize COLA, as a ‘concept’... but not the mechanism, which is linked to the retail price index.  

On the subject of ‘COLA criticism’, though: last September, the MEA called for COLA to be ‘capped’. Also, when this year’s COLA was fixed at €9, the GWU issued a statement calling on the MEA not to object: on the basis that employers had always benefitted from very low COLA increases, in the past... 

[Shrugs] No one has ‘benefitted’, really. Remember that if inflation is 0.5%, COLA will be very low. If inflation is 9%, COLA will be very high. That is the situation this year. And we also know that, in 2024, the COLA adjustment will be somewhere in the region of €13-14 a week (give or take one euro): which is very bad news for quite a few employers, right now. 

This is why, last year, the MEA suggested that there should be a stabilization element to the COLA mechanism. Unfortunately, we were misinterpreted as having said that we wanted to ‘reduce COLA’. But that’s not the case at all. What was stated was that there should be a mechanism which subsidizes COLA, between a minimum and the maximum amount.  

So if COLA falls below €3, for example, the amount given would still be €3, regardless: because that would be the minimum. If, on the other hand, COLA exceeds €8... then €8 would be the ceiling. And every five years, a balance would accrue: either in favour of the employer, or the employee.  

That way, we would avoid any sudden spikes: whereby COLA is only 50c one year; but then shoots up to €13, the next. That is very destabilizing for businesses: because even if they plan their costs three years down the line, it is not easy; especially, for the labour-intensive industries. 

But let me repeat: the COLA mechanism itself is objective, and fair. I have never criticized that mechanism; I have never said that ‘it is not measuring inflation properly’. On the contrary: it is accurately measuring inflation, as it is.  

All the same, however: a COLA of €13, next year, spells out very bad news for many companies. And many of them - especially those catering for the domestic market - will seek to transfer this increase to their clients: which could be other businesses, as I said; or it could be the consumer.  

And that is where the wage-price spiral sets in: when you have an increase in wages, which - when not matched with a corresponding increase in productivity - will result in a second round of inflation; and this time, not ‘imported’ inflation.  

This is the danger we warned about. Because when we have inflation, due to the increased price of imported goods and materials, then... well, it’s not ideal, naturally; but at least, we’re at the same level as all other countries. If the cost of, let’s say, ‘grain’ or ‘cereals’ has gone up in Italy, due to the Ukraine-Russia war... it will have gone up for everyone.  

But when wages surpass productivity, they will then start to rise - not because of imported inflation; but due to domestically-generated inflation; and also, other labour market pressures. Because ultimately, it is not only inflation that is pushing wages up.  

To put that another way: some companies can absorb COLA without any problems. You mentioned the i-Gaming sector, for example. What’s a €13 weekly wage increase to them? Not ‘nothing’, perhaps – it’s always an added expense - but let’s face it: for that sort of company, it is not really much of an issue.  

But for a company operating in, for example, low value-added manufacturing... an automatic increase of €13 – possibly, on top of other increases that are linked to collective agreements – will force those companies to rethink their pricing-policies. They might even end up having to rethink their entire operational organisation, as well... 

On that note: the MEA is currently calling on the government to “provide a sense of direction and economic vision in light of challenges facing employers”. What does that actually mean in practice, though? Short of government interference in private salary-structures; or the imposition of some kind of ‘price-control’ system – both of which, as far as I am aware, are illegal – what can government actually do, to avoid this ‘danger’? 

Well: let me throw out a few ideas. Last year, employers were asked to issue an extra €9 a week, in the form of COLA. Now: I stress that it is the EMPLOYERS who pay COLA; because many people still think that it is paid by government. Not true at all. The government gives out nothing; it is the employer who pays the cost-of-living adjustments. This is something we need to make people understand.  

But in any case: those extra €9 are issued with the express aim of compensating for inflation. But out of those €9, 10%-plus-tax are taken by the exchequer, by way of national insurance and taxation.  

So in reality, the employer pays €9 to the employee; but between €3 and €4 go to the exchequer. Here, I think, should be our starting point. As of next year, the COLA adjustments should be exempt from all tax and NI deductions.  

Because if the employer is being asked, as part of the COLA agreement, to compensate employees for inflation... then that compensation should be purely for inflation; and entirely for the employee. It is not fair to have part of that compensation passed onto government, by way of taxation.  

This year, for instance, it's been calculated that around 50 million went into government’s coffers, from COLA alone. I, for one, don’t think that makes any sense. 

I see your point; but I don’t really understand how it would help the employers. Let us, for argument's sake, assume that next year’s COLA will indeed be tax-exempt, as you suggest. What difference will that make, to an employer who still has to pay out the full €13 anyway? 

It would help reduce further claims for wages. Because if an employee’s purchasing power goes down by, say, €13 a week... but in his pocket, he is ending up with only €9... what’s going to happen? The employee will probably make further demands to be compensated; or else, will shop around to find alternative employment.  

Therefore, giving out the full COLA compensation – without tax deductions -- would be a good start, to prevent further wage claims in future. 

But it’s only a start. Part of those €13 could also be given out in the form of tax credits. You could have a fiscal intervention to assist those who are worse off; because even if the government gives tax credits, there is a section of low wage-earners that do not pay any tax. It wouldn't really elevate their situation; so there could be focused fiscal interventions, to help those who are more in need. 

There is also the stability mechanism we suggested last year. That proposal is still on the table... even though I think we should commit ourselves that, for 2024, everything should stay the same. Because it wouldn't be very fair on the employee, to introduce a stabilizing mechanism now: when we already know the COLA amount will be higher than the proposed maximum.  

I understand that; and I want to be fair with all parties. But in principle, there should be this kind of stabilization element... 

These proposals may relieve some of the pressures faced by employers. But there is one aspect of the MEA’s criticism that cannot be so easily resolved: Malta’s dependence on foreign labour. Once again, the MEA is calling on government to ‘do something’ about this situation; but – even if it were possible (which it isn’t) to just ‘kick all those foreigners out’ – what can be done about the DEMAND for those workers?  

Number one: we are not suggesting ‘kicking people out’. Secondly, we’re not talking about ‘turning the clock back’, either. The reality is that you cannot turn back; we are, where we are.  

Thirdly, we need to dispel the myth that many companies prefer to engage foreign employees, over Maltese. That is nonsense. The cost of employing foreign employees, far outweighs the benefits. There are permits, which take a long time to be issued; you need resources and admin; and generally, foreign employees don't stay for a long time with one company. So it's not as simple as saying that: ‘foreign employees are cheaper than Maltese; get me someone from Nepal.’ It doesn’t really work like that, in practice. 

Perhaps. But there is another ‘myth’ about foreign workers in Malta: namely, that they are hired to do the sort of work that most Maltese employees no longer want to do... 

Is that really a myth, though? 

I was about to ask you that very question myself... 

I would say it’s mostly true. Unfortunately, the public sector has absorbed a significant number of unskilled/semi-skilled people, on the basis that – given a a choice between a job in the public sector (where maybe you can clock out at 11am), or else, a private-sector job washing dishes for more or less the same remuneration... what are most people going to choose? They will aspire for the easy life. That is what is happening to us now; and it has been happening for ages.  

Also, bear in mind that in some sectors – especially, health - the demand for certain services is ballooning, is step with our population. As the population grows, there is higher demand for nurses, care workers, doctors, and so on... and the local labour supply cannot keep up with the demand.  

Now: if the population continues to expand, a higher percentage of Maltese will be absorbed into these essential, public-sector services. So we could end up in a situation where the public sector would employ 25% of the total labour force... but because of the sheer amount of foreign labour, the public sector would effectively be employing more than 50% of the MALTESE [emphasised] labour force.  

And this also means that in the private sector, we will end up with most employees being of non-Maltese origin. Now: to be clear, I am not bringing this up out of any ‘xenophobic’ concerns. Quite frankly, xenophobia doesn't concern me, at all. What employers are concerned about, however, is whether they will have people to actually employ.  

And it is for this reason, that we need to have a discussion about the direction this country is taking. We need to ask ourselves: ‘Listen: what are we really aspiring to, here?’ Because even when one mentions that the population is going to keep on expanding.... what message does that give to the construction sector? If you are a contractor, what does that tell you? ‘There’s a market; keep on building!’  

Whereas if we say: ‘Listen, we are going to hit the brakes; we are going to rationalise the Maltese labour force; we are going to try to reduce the dependency on foreign labour’... once again, I'm not saying ‘kick them out’. But if there is a turnover for each labourer, every one or two years: it means that you don't need to replace every single employee that leaves. That way, we can control the population of foreign employees in Malta.  

But for that to happen, the country needs to be given a clear economic vision, and a sense of direction. And this, ultimately, is what we are calling on government to do.