The employers’ body has insisted that a tax exemption on the cost-of-living allowance (COLA) would have been far more effective in mitigating inflation than compelling importers and supermarkets to reduce their prices on selected products.

The Malta Employers’ Association said that exempting COLA from taxation would result in “immediate and direct” extra purchasing power.

It was asked to comment after the government last week announced that up to 400 basic food items would see their recommended prices lowered by at least 15% in a bid to curb inflation following an agreement it signed with importers and retailers.

More than 200 shops have signed up for the scheme which is expected to last until the budget, usually announced in October.

MEA said that, in their proposals for the last budget, both unions and employers urged the government to exempt COLA from deductions but this consensus went unheeded.

Each year, the weekly salary of all employees is increased according to the cost of living adjustment (COLA) mechanism, which is worked out on a fixed formula based on the cost of a basket of products and the minimum wage.

Last year, there was a record €12.81 cost-of-living increase per employee  and the government is set to reclaim approximately €3.50 per week through tax. Employers also have an added cost of social security contributions.

The MEA estimates that as much as €40 million that is due to employees as compensation for inflation is actually diverted to the government through income tax and social security contributions, rather than to the intended beneficiaries.

“The deficit between the net amount received by employees and the full COLA – which is meant to address inflation –  could in itself cause further wage inflation, with the consequent impact on the general price level,” the association said.

It said that, while employers are obliged to compensate for inflationary increases through the COLA, these increments were not fully reaching their intended beneficiaries – the employees. This practice is deemed unfair to both employers and employees and goes against the spirit of the COLA agreement, the association said.

In a similar vein, Chamber of SMEs chief executive Abigail Mamo warned against artificial interventions in a free market economy. She said there was no justification for the government “forcefully” asking importers and retailers to shoulder the burden of inflation.

The government has emphasised that the intervention was not a result of issues related to excessive profiteering and, therefore, there is no justification why this sector was forcefully asked to shoulder the burden of inflation, she told Times of Malta.

“The food sector is not the only sector that has been impacted by high prices. It is the majority of sectors and, therefore, singling out this sector is unfair. The government should think of long-term plans to protect Malta from inflationary pressures coming from abroad and, therefore, strengthen local production, with all efforts necessary, especially when it comes to the food sector,” Mamo said.

She said the SME Chamber was also disappointed with how talks were conducted and the difficult position the private operators were placed in.