Over the past two years, the world has experienced the highest inflation levels in more than four decades. Various sources of economic disruption have contributed to this inflation, most notably the pandemic emergency and Russia’s invasion of Ukraine.

Despite the government’s substantial fiscal measures to shield consumers from the worst effects of persistently rising prices, most families and businesses still struggle to cope with the cost of living mainly sparked by escalating business expenses. Raising interest rates will not resolve this severe threat to people’s well-being. The current high inflation is mainly supply driven. A more tailored response is required, including a fiscal policy that alleviates the supply constraints.

PN leader Bernard Grech has suggested some responses for the government to consider in addressing the situation. The Malta’s Employers’ Association and the Chamber of SMEs have reacted to Grech’s proposals and added their views on how best to deal with the dynamics of today’s inflation.

The current projections of the statutory COLA increase for 2024, based on prices in the first few months of this year, are that it will reach €13 per week, according to a report in this newspaper a month ago. This kind of salary increase will inevitably force employers to raise their prices, rendering the cost-of-living adjustment futile for consumers struggling with costs.

One of Grech’s suggestions is for the government to stop taxing COLA. Both the MEA and the Chamber agree with this suggestion, arguing that the government should not be taking away a portion of the very grant it has given consumers to compensate for inflation.

While this argument is undoubtedly logical, the Chamber’s CEO, Abigail Agius Mamo doubts whether the government would agree to waive the tax on COLA increments because “governments have always been reluctant to remove such a tax as they would face harsh resistance were they to introduce it further down the line”.

Grech also called for the setting up a fund to cushion shipping prices for importers and exporters. The MEA and the Chamber disagree with this recommendation. They would prefer to see the government launching schemes that would “aid importers to extend their warehouses and storage spaces and buy products in larger quantities”.

While inflationary pressures are slowly easing, supply shocks will continue to emerge. The bargaining power of most workers will continue to be weak as the current economic model is based on keeping labour costs low to sustain low-value-added economic activities.

Agius Mamo insisted that while mitigation initiatives are beneficial in the short term, they are “firefighting strategies”. She added: “We must find ways to increase productivity, education and workers’ skills.” Put simply, improving productivity in high-added value economic activities through investment in technology and people, rather than increasing production by increasing low-cost labour, is the kind of response the country needs in order to tame inflation.

Fiscal largesse is not a long-term solution. This is partly due to the government’s recklessness in recent years, such as its abuse of taxpayers’ money – to the tune of hundreds of millions – in phantom projects like the privatisation of hospitals’ management. Moreover, the current freezing of energy prices hides the risks of further inflationary pressures. Despite the government’s denial, cushioning adverse energy market forces indefinitely is not sustainable.

The government must put the country’s long-term interests before short-term electoral expediency when defining what needs to be done to tame high inflation. Adopting an economic model that promotes high value-added activities based on investment in technology, education and enhanced workers’ skills will be challenging but the only way of ensuring the well-being of people.