Long-term high inflation could make Malta uncompetitive – Chamber of Commerce

Last Updated on Tuesday, 26 September, 2023 at 11:45 am by Andre Camilleri

The Chamber of Commerce is concerned that long-term high inflation could make Malta uncompetitive, adding that one way of mitigating it without negatively affecting the economy is by improving the efficiency of the public sector.

The Chamber was reacting to warnings by Finance Minister Clyde Caruana that inflation is here to stay for an indefinite period.

When he addressed the Malta Council for Economic and Social Development a few days ago, Caruana said that the inflation rate, which stands around 5-6%, will take a long time to return to the normal 1-2%.

The Chamber was asked what the government could do to shorten the period of time for inflation to be brought down to more manageable rates. The government, the Chamber said, has limited its intervention to subsidising energy and some basic inputs, such as flour. There has been no intervention on transport costs to reduce imported inflation, no tweaking of the cost of living adjustment mechanism to avoid a wage-inflation spiral and no attempt to stimulate increases in interest rates or other policy measures that could dampen demand. These can all be done to mitigate inflation, the Chamber said.

“But the policy direction seems to be to let inflation persist to avoid the risk of any potential contraction in demand. And because inflation is also influenced by expectations, the more we say that we have to tolerate a higher level of inflation to continue growing the economy, the more likely it is that we will have higher levels of inflation irrespective of whether the economy grows as predicted or not,” the Chamber added.

The biggest risk of this strategy is that we become uncompetitive in the long-run. While other countries continue to have similar rates of inflation, we can sustain the inflationary pressure, but the moment other economies respond to higher interest rates and manage to bring their inflation under control, we have no levers available to do the same. So it is imperative that we do all we can to remain below the inflation rate of competitor countries, the Chamber said.

The government can be proactive in mitigation inflation without running the risk of slowing down the economy. Such initiatives should centre around improving efficiency and productivity in the public sector, incentivising work, shifting government spending from recurrent expenditure to investment in infrastructure that can reduce costs and improve the efficiency and productivity of the whole economy, and ensuring that public funds are wisely spent.

Specifically, the Chamber said that the government should:

i)          Curb superficial recruitment in the public sector and make sure that everyone who has a job in the public sector is doing something that is useful, is adequately qualified to do it, is doing it for the number of hours for which he/she is paid to do it and is being paid at market rates not at a premium;

ii)         Revise tax bands to provide for an increase in the disposable incomes of low to medium earners without fuelling further increases in labour costs;

iii)        Make sure that there is no systematic abuse of social benefits;

iii)        Invest in technology to improve public service delivery and enforcement, including tax compliance;

iv)        Implement measures that will reduce the number of cars on the road and reduce congestion, such as introducing on-street parking fees in congested areas to encourage use of public transport and shared mobility;

v)         Upgrade the energy infrastructure to reduce costs related to disruption of business, loss of perishable goods and damage to equipment due to power cuts;

vi)        Ensure that all public procurement is carried out transparently and diligently, both during the tendering stage as well as during delivery and servicing, to guarantee the best value for taxpayer money and to promote businesses that provide quality goods and services at a competitive price;

vii)       Avoid providing services that can be provided efficiently, reliably and competitively by the private sector, and intervene only where the market fails to provide adequately for the social, economic and infrastructural needs of the country.

TMIS also reached out to the General Workers Union for its input on the subject.

In its answers to the same question, the GWU said that reducing inflation and bringing it back to a target range of 1-2% is a complex economic challenge that requires a combination of fiscal, monetary and structural policies.

The GWU also pointed out that “the government, like any other government, can take certain action to help decrease the recovery time for inflation to return to the desired level”, adding that given Malta’s small size and open economy, international factors can significantly impact the rise in the cost of living.

At some of its proposals, the GWU said that the government can engage in international cooperation and trade agreements which in turn can help mitigate external inflationary pressures.

It noted that the Central Bank of Malta can use its monetary policy tools to control inflation, such as adjusting interest rates.

“If inflation is above the target range, the Central Bank can raise interest rates to discourage borrowing and spending, which can help lower demand-pull inflation,” the GWU said.

Moreover, it said that the government can use fiscal policy to influence inflation as well. For instance, continue to absorb the difference in prices in energy, fuel and cereals prices.

“This has helped immensely families and business and it was part of the accelerated recovery of the Maltese economy,” it said.

Last year, this was the GWU’s main proposal and this year the union is also proposing that this policy is extended to next year.

In other suggestions, the union said that the government may also consider price controls on essential goods through indirect policies to prevent excessive price increases.

“In our pre-budget document we proposed that the government introduces incentives for the set-up of price comparison websites. We also proposed soft loans for business so that they can buy for a whole year and in return they must keep prices stable. From an employee’s point of view, the main tool to fight inflation is the cost of living adjustment.”

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