COLA bound to raise prices

The recently announced Cost of Living Allowance (COLA) adjustment for 2024 in Malta, confirmed by Finance Minister Clyde Caruana, has sparked concerns within the business community.

The adjustment, set at €12.81 per week, represents a substantial 30 per cent increase on the previous year’s €9.90.

This might sound like good news to every person that earns a living in this country, however, this is not necessarily only good news. There are repercussions of such a significant rise in COLA, particularly its impact on employers and the broader economy. It will, ultimately, impact prices for all goods and services, practically everything people purchase on a day-to-day basis.

As the COLA sees a considerable uptick, employers are facing heightened pressure to accommodate the increased financial demands on their workforce.

The concern lies in the fact that this augmented compensation comes without a corresponding increase in productivity, placing an additional strain on businesses. Employers are now compelled to pay more for the same output of work, raising labour costs and, subsequently, affecting the overall profitability of enterprises.

To put this in actual context, a company that employs 100 people is going to have a direct impact on its bottom-line profit of €66,612.

The surge in COLA translates into an augmented financial burden not only for employers but also for consumers. The direct correlation between increased labour costs and the final cost of goods and services is inevitable.

As businesses grapple with elevated expenditure on wages, they are likely to pass on these additional costs to consumers through price hikes. This ripple effect across various sectors is anticipated to contribute to a general increase in prices, posing challenges for consumers and potentially fuelling inflation.

The finance minister, however, remains optimistic about the situation, downplaying concerns of a wage-price spiral. He asserts that a significant portion of the increased labour costs will be absorbed by business profits.

Why should businesses suffer a reduction in profits?- Alan Abela-Wadge

Caruana expects companies to adjust by lowering profit margins to compensate for the surge in wage bills. Additionally, he emphasises that the COLA mechanism is the most effective means to counteract the erosion of purchasing power, dismissing worries about potential inflationary consequences. However, we all know that there will be a significant difference between expectations and what will happen.

Why should businesses suffer a reduction in profits? Why should the burden of inflation be shouldered only by the employer? This has never happened in the past and I can’t see a way how this will start happening now.

As Malta grapples with the significant COLA adjustment for 2024, the implications for employers, consumers and the broader economy are under scrutiny. The balance between addressing the needs of the workforce and ensuring the sustainability of businesses remains a delicate challenge.

Policymakers, businesses and stakeholders must collaborate to navigate these economic dynamics and strike a balance that fosters growth without compromising stability.

An increase in COLA, albeit necessary, is not the solution to combat inflation. There are a lot of other measures in the budget that is tackling that, however, there are other things that also need to be addressed.

Celebrating such an increase in COLA is not necessarily a positive thing for the public because, based on what always happened in the past, we are bound to see an increase in prices across the board.

Alan Abela-Wadge has a DBA (business administration).