The cost-of-living adjustment (COLA) awarded annually in the national budget is likely to reach a whopping €8 per week, hitting the country’s competitiveness because it will increase costs for businesses, experts believe.

University economics professor Philip von Brockdorff predicts that next year’s COLA will probably go past €7 per week and hover around the €8 mark by the post-summer budget.

The COLA is awarded to all workers starting in the year ahead. It is worked out on a fixed formula that takes into consideration the minimum wage and the past year’s inflation, which this year has spiralled.

It is paid by employers as part of their workers’ salary. Over the past 10 years, with inflation fairly stable, COLA has hardly ever gone above €4. Both this year and in 2020, the adjustment was of €1.75.

Since 1990, it has only gone beyond the €5 mark three times.

Higher wages tend to push prices up as businesses shift the cost onto the consumer.

Von Brockdorff observed that the COLA for next year would be even higher had the government not absorbed the increase in energy prices so far.

“But for how much longer? This is very relevant because as things stand businesses and households have been shielded by the increase in energy prices,” he said.

“This has allowed businesses to remain competitive, especially those that export products and services.”

Impact on tourism sector

But with the next cost-of-living adjustment raising the cost of business, this is likely to affect competitiveness, particularly in the tourism sector, he added.

Rival destinations in Spain and Portugal are already offering very competitive rates boosted by more frequent flight connections with the UK and elsewhere.

Von Brockdorff observed that wages in the tourism sector have generally been low, helped largely by a recruitment policy that gives preference to third-country rather than EU workers because of the inferior working conditions they can be offered.

“Hotels that are run efficiently may be able to absorb the increase in COLA but this will not apply to all hotels. The same argument holds for other economic sectors but to a lesser extent the construction sector which shows no signs of slowing down and where prices continue to increase,” he said.

'Businesses need to be supported'

According to employers, the rising cost of raw materials is already a big headache for businesses and they are also having to pay higher salaries to retain their employees due to shortages in the labour market.

“If COLA leads to a systematic increase in the cost of production of goods and provision of services, it will fuel further inflation and the economy will enter into a vicious cycle of inflation that will be difficult to pull out of,” Malta Chamber president Marisa Xuereb told Times of Malta.

“The challenge for government, employers and unions will be to strike a balance between maintaining the purchasing power of lower-income groups and limiting wage-cost inflation that would not only fuel further price increases for consumers but would reduce the competitiveness of our exports. It would further squeeze businesses already struggling with massive material and transportation cost increases,” she said.

Businesses hardest hit by the current international crisis need to be supported because material and transportation costs are not expected to remain at record levels forever.

Her counterpart at the Chamber of SMEs, Abigail Mamo, concurred, adding that businesses were among those most heavily impacted by inflation.

“When it comes to business challenges, the shortage of workers stands at par with inflationary pressures. The current crisis in human resources is resulting in a high level of wage inflation of its own accord.

"Businesses are raising wages across the board to try not to lose people, even if this does not relate to any advancement in terms of skills or productivity,” she said. "So wages are already well on the increase and by amounts which are not small.”

Goods delivery drivers are among those whose wages have risen as businesses bend over backwards to retain their staff, who are increasingly hard to replace. Some businesses, such as cafeterias, are struggling to find workers, leading some to offer their employees higher wages to remain.

COLA will affect public coffers

But COLA will also affect the public coffers, since government is the largest employer.

Von Brockdorff questioned whether such a large increase, coupled with energy subsidies and other schemes under which the government provides guarantees on loans, is financially sustainable.

He said that the deficit was expected to be lower this year than 2021, when the government had extra expenditure related to the pandemic and the wage supplement.

But although the government has more space to manoeuvre, it must prioritise a return to fiscal stability, he stressed.