It would be in the interest of both employers and workers if the government stopped taxing COLA, but other measures are also needed to help address the country’s economic challanges, according to employers’ and small businesses lobby groups. 

Malta Employers’ Association director-general Joe Farrugia and Chamber of SMEs CEO Abigail Agius Mamo were reacting to comments made on Sunday by PN leader Bernard Grech, who called on the government to stop taxing the cost of living adjustment (COLA), introduce fiscal incentives to prevent employers from raising prices and cushion shipping prices for importers and exporters.

The new COLA of €9.90 per week is forcing some employers to raise their prices, rendering the cost of living adjustment futile for consumers who are struggling with prices just the same as before, Grech said in an interview on the party’s station on Sunday. He argued that the government should at least stop collecting taxes off COLA and introduce fiscal incentives that allow employers to stop feeling the constant need to raise prices to keep up with the growing wage expenses.

“If the government deemed €9.90 as the necessary increase for people to cope with inflation, how come the same government then takes away some of it in taxes?” Grech said. “It’s not fair.”

Governments have always collected taxes on COLA, but in the past the allowance had almost always hovered around €2 per week. With this year’s €9.90 per week, the discrepancy in extra tax revenue is significant.

Times of Malta had found the government will collect around €25 million in extra taxes from this year’s COLA.

Speaking to Times of Malta, Joe Farrugia agreed that the cost of living adjustment should not be taxed. The government should not grant people a raise to compensate for inflation and, at the same time, take away a portion of it, he said.

“It would make sense that, whenever there is a COLA increase, there is a tax adjustment for such an increase to reflect a net increase in pay. This is important since inflation has persisted and an equally high, or even higher, COLA is expected to be announced in the next budget,” he said.

“And many employers are concerned.”

Agius Mamo also believes such a measure would be beneficial for businesses and workers but said governments have always been reluctant to remove such a tax as they would face harsh resistance were they to reintroduce it further down the line.

“There are other ways to help businesses, not least with fiscal incentives or support schemes,” she said.

No guarantee businesses will not push prices up

Farrugia acknowledged that an increase in labour costs is contributing, to an extent, to secondary inflation, but said giving fiscal incentives might not be enough for the government to ensure that businesses will not increase prices.

There is no automatic link between prices and costs, he said.  In some cases, businesses must absorb costs themselves as passing such costs to customers might result in a drastic loss of sales. In others, businesses may raise their prices even in times when costs are stable, if they believe their product or service is in high demand. Such incentives will, therefore, not necessarily mitigate the inflationary effect.

Both Farrugia and Agius Mamo were not very keen on supporting Grech’s call for a fund to be set up to cushion shipping prices for importers and exporters.

Farrugia said most of the costs are incurred during an arduous and expensive process that takes place in Malta, when merchandise arrives from oversees, and the government would do well to ease some of those costs that have been plaguing industries for decades, through a simplification exercise. The increase in costs of international logistics has made the inflationary impact of transportation worse than it could have been.

Agius Mamo said that while shipping expenses were expensive, the costs are now gradually stabilising and a more pressing problem is that prices have been primarily raised oversees, so inflation is being directly imported to Malta.

To mitigate the problem, the Chamber of SMEs had urged the government to launch a scheme that would aid importers to extend their warehouse and storage spaces and buy products in larger quantities, in a bid to address shortages and be able to negotiate better prices on bulk buying. The idea was adopted and the scheme was rolled out.

She said not much can be done to address high international prices, but it would be wise for the government to reduce reliance on imports – to explore ways to boost local industry and increase the local production of essential goods in an efficient and sustainable manner.

‘Firefighting strategies’

But Agius Mamo insisted that while mitigation initiatives are beneficial in the short-term, they are only “firefighting strategies” – meaning they are not addressing longer-term issues facing local industries.

“We must find ways to increase productivity, education and workers’ skills. It’s not that we must work more, but we must find ways to produce more added value with the amount of work we already do,” she said.

“That would effectively address the country’s long-term economic challenges.

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