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Our View: IMF offers rational approach to CoLA

file photo: a participant stands near a logo of imf at the international monetary fund world bank annual meeting 2018 in nusa dua

The taxpayer will have to provide another €60m that was not budgeted this year to pay for the increase in CoLA (from 50 to 67.7 per cent of the rise in the retail price index) that the government agreed with the so-called social partners, including employers’ organisations. Calculations, in another irrational move by the generous government, were based on last year’s inflation rate rather than that in 2023 which is markedly lower.

In short, the government went out of its way to maximise the CoLA that would be given to the public and semi-public workers, who were already the highest-paid in the country. In the private sector a smaller proportion than 30 per cent of the workforce benefited from a pay rise that was introduced in June, and this percentage did not include the lowest paid who are not covered by collective agreements.

The government’s generosity, in effect, meant public sector employees receive pay rises of between €200 and €500 and private sector workers on the minimum wage receive nothing, even though, as taxpayers, they would fund the increased wages of the highly paid employees. Increasing the pay gap between highest-paid and lowest-paid is the government’s idea of building social coherence.

Worse still, the increase in CoLA also pushes up the rate of inflation making items even more expensive and further reducing the disposable income of the lowest paid. The unions refuse to see this and neither do government ministers, going against all economic logic, and the practice in all other EU states, in which wage indexing was scrapped many decades ago because of its harmful effects.

These were highlighted in an IMF paper, released this month, which said one per cent increase in inflation “raises wages in the private sector by 1.4 per cent and in the public sector by 2.3 per cent.” This was “considerably higher than in most advanced economies in Europe,” said the report. The paper also warned that while external developments drove inflation in 2022 (high energy prices) “domestic developments will increasingly determine inflation going forward.”

The IMF report was written before the increase in CoLA was decided – not that the government would have taken it into account – but warned: “Any upwards revisions of CoLA would risk sustaining high inflation and weakening the economy structurally.” Apart from increasing the already high public wage bill and “reducing fiscal space” CoLA also weakens economic resilience and competitiveness in the private sector, said the report, which also noted that “rising costs of living have had a larger impact on lower income earners.”

And by increasing CoLA the government will further increase the cost of living for low-income earners. This is the view of highly qualified IMF economists, but our government took a decision, exclusively for boosting its popularity, based on the demands of economically clueless union bosses. A rational and responsible government would have used the extra €60m it will now spend boosting the wages of well-paid public sector workers to support low income earners, but the Christodoulides government is instead contributing to making the latter even worse off by boosting inflation.

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