After 10 consecutive months of rising eurozone inflation, consumer price growth in May reached 8.1 per cent, its highest point since the single currency’s creation in 1999.
The government has often prided itself on having one of the lowest inflation rates in the EU, thanks to generous subsidies financed with taxpayer money. In May it reached an estimated 5.6 per cent. Realities are now catching up with policymakers.
The steep rise in prices will inevitably be reflected in the cost-of-living allowance (COLA) that is granted in the annual fiscal budget in October and is worked out on a fixed formula every year.
University economics professor Philip von Brockdorff believes that the COLA will reach between €7 and €8 per week for 2023, the highest since 1990.
The Malta Chamber and the Chamber for SMEs business lobbies fret about the risks that these increasing costs pose for employers and small businesses.
It is time for the government to take citizens into its confidence and tell them how it intends to deal with fast-rising inflation.
It is time for the finance minister to engage in straight talk to the business community, consumers and households about the country’s challenges arising from the extraordinary economic disruptions that surround us.
This will not be an easy task. Too many imprudent promises in the months preceding the election have lulled misinformed citizens into believing that Malta is immune to the harsh realities that all other EU countries are facing.
The first reality check must include honest information on how high local inflation would have gone had the government not subsidised fuel, electricity and certain food products so substantially.
Laser-sharp measures are needed to deal with the inflationary pressures, which are not expected to disappear any time soon.
The COLA increase will be a two-edged sword. While it will help the more vulnerable families to cope with the rise in prices of living essentials, it will increase salary costs for businesses, possibly fuelling an inflationary spiral.
At this juncture, the government will need to resist pressure from public service trade unions to enter into new collective agreements that award significant wage increases.
Once again, this will not be an easy task. Some parts of the public sector, like health and education, are losing essential qualified staff because of inadequate working conditions. Importing (and sometimes exploiting) low-cost qualified staff from Third World countries was never the best option. It is now becoming even less feasible as such staff will rightly demand better wages to work in Malta.
Businesses should also do their bit to manage the pressures of rising costs, which are increasingly looking like a long-term challenge. It is also clear by now that some businesses and operators are unjustifiably raising prices, at the expense of a consumer who appears to have nowhere to go for protection.
The government needs to redirect the generous support given to practically all businesses during COVID towards more targeted areas. Admittedly, some businesses will not be able to survive without further subsidies.
But limited fiscal resources cannot be used to support unviable companies that would crowd out others with better long-term prospects. The tourism industry is arguably the most vulnerable as it has for too long focused on low returns rather than adding value for long-term sustainability.
The government must somewhat manage the credibility gap it has created in recent months by its promises to increase public expenditure for the next five years without increasing taxation.
A mini-budget at this stage should serve as an overdue reality check.