They say history tends to repeat itself. At the outbreak of World War I in 1914, many where under the illusion that this would be a quick affair. German Emperor Wilhelm II famously promised to his departing troops, in August 1914, that they would return before the autumn leaves fell. As they say, the rest is history. World War I dragged on for four and a half years, claiming some 10 million lives.
Fast forward to 2022 and we are six months into the Russia-Ukraine war and we have no clue as to how long this war will prolong. What we know so far is that this has now developed into a war of attrition on various fronts, not just on the battleground, with clear attempts to use economic sanctions and the use of strategic resources as part of the attrition war strategy.
With each passing day it is becoming more evident that the economic strategy of any country needs to be based on making sure that its economy and financial resources are ready to withstand the effect of this war in the longer term rather than just the short term.
At the beginning of August, the IMF went as far as to advise European governments that it should withdraw from having a broad-based support on rising energy costs and shift towards targeted relief to lower-income households who suffer the most from higher energy bills.
The IMF argues that broad-based, price-suppressing measures, including subsidies, tax cuts and price controls, simply delay the needed adjustment to the energy shock by reducing incentives for households and businesses to conserve energy and enhance efficiency, while the ever increasing energy costs will continue squeezing the limited fiscal space that European governments have as high energy prices persist and are likely to persist for quite some time.
It is against this background that the proposals put forward by the Chamber of Commerce in the run-up to Malta’s 2023 Budget should be considered. These are not normal times, and we should not be deciding Malta’s economic strategy using a ‘business as usual’ mindset. The present international economic situation triggered by post-pandemic disruptions but mainly by the Russia-Ukraine war has created a set of economic situations akin to a so-called ‘perfect storm’.
While the government has tried its best to cushion Malta when it comes to energy and spiralling fuel costs, we must ask ourselves how long can government keep subsidising in the longer term? Should government keep subsidising energy costs for all and sundry at whatever level of consumption?
The proposal put forward by the Chamber to cap the broad subsidy on energy to a certain level is intended to create a balance between reducing the negative impact of higher energy prices on the economy while still allowing a possible change in consumption patterns by charging market energy rates for those consuming beyond a certain level of energy.
This is time for true leadership- Silvan Mifsud
We would be losing an opportunity to change mindsets and consumption patterns if we do not use the present energy crisis to make the much-needed quantum leap towards more sustainable energy sources.
Shifting some of the savings from the subsidy expense government would have, if it takes up the Chamber’s proposal on energy consumption, to then offer better subsidies to households and businesses that invest in renewable energy solutions, would definitely help in making this quantum leap.
If the pandemic has taught us anything it has taught us that a crisis can serve as a catalyst for change, like the pandemic has served as a catalyst for change in the labour market and digitalisation.
The same goes with regard to the Chamber’s proposal on the infamous Cost of Living Adjustment. The last thing we need is having policies and measures that create further homemade inflationary pressures. If anything, the present reality should make us think if our COLA mechanism needs to be changed or fine-tuned as it is likely not the ideal tool to have during sustained high inflation periods as we seem to be facing for some time ahead.
Malta is facing the reality of a very tight labour market. As a result, wages are increasing due to the basic microeconomic principles of supply and demand. This is evident also from the average wage statistics issued in the Labour Force Survey. In Q1 2019, the last pre-pandemic year, average wages increased by around 3% over Q1 2018.
In Q1 2022, the average wage increased by around 5% over Q1 2021, with the increase being much higher than that in various sectors. Topping the increase in wages with a large COLA increase will be like throwing petrol on an open fire – pushing inflation even higher.
All the above reasons should lead policymakers in Malta to give further consideration to the Chamber’s proposal, whereby a COLA increase should only be given to those who have not had an equivalent wage increase from January 2022. The Chamber’s proposal on COLA is not intended for employers to try to dodge an expense. It is intended to cope with the current circumstances in a sustainable way.
The bottom line is that we should be facing reality in its face. Government and employers do not have a bottomless pit of financial resources, whereby wages can keep increasing endlessly or energy subsidised at whatever cost, especially since inflationary pressures are likely going to be with us for a while.
This is time to take stock of the particular economic situation the world is in. This is time for true leadership. This is time to look ahead and have the courage to change what needs to be changed to remain afloat in such troubled waters.
This is time for the MCESD to really come together and look at an economic strategy as one coherent whole, rather than a sum of horse-trading of sectorial interests. If we fail to do so, the long-term COLA – Costs of Leadership’s Absence, will have detrimental long-term effects for all, much worse than the hardship from inflation.
Silvan Mifsud is chair of the Malta Chamber family business committee