Removing tax from the Cost of Living Adjustment would lead to having "two classes of workers", Finance Minister Clyde Caruana said on Wednesday. 

Caruana argued that the anomaly would arise because thousands of workers covered by collective bargaining deals do not receive COLA. 

Instead, those workers tend to have an annual increase included as part of their agreements.

“If we implement the PN’s proposal, we’ll end up with two classes of workers: those who are taxed on their annual increase, because they don’t get COLA, and those who aren’t,” Caruana said.

The minister was speaking at the tax and customs offices in Qormi two days after he unveiled the Budget for 2025. 

The Opposition, which has long called for the government to make COLA tax-exempt, noted after the budget that the proposal was ignored.  

Caruana said the budget's headline measure - a widening of tax bands that will effectively reduce workers' tax burden - was only possible thanks to improved tax collection by the tax department.

He said the tax cuts announced on Monday "would have been impossible without the tax department's effective work.”

In the first six months of this year alone, the government collected €300 million more than in the previous year, Caruana said.

The tax changes Caruana announced during the Budget 2025 speech on Monday are projected to cost the government €140 million in all. 

They will see income tax bands broadened, allowing single workers to avoid tax on their first €12,000 in 2025.

Married people, who make up around 14% of all taxpayers, will see a similar increase in tax-free income from €12,700 to €15,000, while parents will not be taxed on the first €13,000 of their income.

Caruana: Capital spending still up

Caruana was also asked why the government decided to reduce taxes instead of collecting more revenue to spend on capital projects - a concern raised by the Malta Employers Association in its pre-budget document.

Caruana argued that capital spending is strong despite the tax cuts, saying that this year capital expenditure will top €1 billion. Over the past two years, the government has increased its capital expenditure budget by €250 million, he said.

The government has enough money to invest in energy infrastructure, Caruana insisted.

Tax cuts made sense because "it was time to give something to the middle class, which has contributed so much to the country’s economic growth,” he said.