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Your €1.75 increase is not set by the government

The government has had no direct control over the value of COLA since 1990 as it is based on a formula agreed upon by all stakeholders.

Every year, the Minister for Finance announces the amount wages are set to increase to compensate for inflation, which is a measure of the higher prices that households need to pay to meet day-to-day needs. More often than not, the amount is so small that everyone ends up asking, “Is this really how much we deserve?”

Needless to say, whoever is in opposition gets on the bandwagon and tries to mock the small increase. This year is no exception with the Nationalist Party publishing these images on their official social media pages.

Quite frankly, any narrative that blames any government for the small raise attributed to inflation, either comes from someone who does not understand how the system works or wants you to direct your anger towards a government that has little control over the amount you will get. The reality is that the root of the problem is the Cost-of-Living Adjustment (COLA) Mechanism.

In short, the COLA mechanism was set up in 1990 following the trade disputes that mainly involved the General Workers’ Union and several private firms. All stakeholders reached an agreement that wage levels should be adjusted to inflation based on a formula agreed upon by the MCESD, and would therefore no longer be a surprise element in a budget. This mechanism takes into account the retail price index and is adjusted for production to ensure that the COLA mechanism does not overburden employers who must in the end fork out the money and make ends meet. The COLA formula is in fact established by law and is computed as follows:

COLA= weekly wage base rate x 12-month average RPI

It is the RPI component that measures the amount by which prices have increased, and it is therefore at the core of the ultimate amount of COLA – if the RPI is low, COLA is low. In fact, the 12-month average RPI for September announced by the NSO (who is responsible for determining the RPI), is lower than the annual inflation rate (i.e. calculated as a year-on-year increase):

This is because, as the chart above shows, after a sharp decrease in prices during the peak of the pandemic, prices shot up dramatically only after April. This sharp increase is not fully captured by a 12-month average RPI. The 12-month average, however, is not the main issue with the RPI, but rather, the weights assigned to price increase of the different goods consumed by a typical Maltese household – the more a good is consumed, the higher the weight assigned to it, and these weights currently stand as follows:

How are these weights determined? They are determined according to what is called Household Budgetary Survey (HBS), which was last run in 2016. Having a more frequent HBS can help make the weights of the RPI more up-to-date, meaning a more appropriate COLA.

In the end, the government, therefore, has had no direct control over the value of COLA since 1990. The formula has remained unchanged to this date, despite both parties claiming that changes should be made to the system throughout the last 30 years. This leaves those with lower income more vulnerable to inflation.

Minister Clyde Caruana has promised to revise the system. The mechanism itself will remain unchanged but after talks with the relevant social partners, there should be a separate system that comes into play to further protect the poorer members of society. Whilst how this new mechanism will work remains to be seen, we should welcome such a measure if it protects those more vulnerable in society.

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