Poverty trap – keep digging, it’s the only way out

The man in the street regularly watches TV announcements about a healthy economy and a healthy tourist industry firing on all cylinders - all leading to record low unemployment levels. 

This all sounds hunky dory when other southern European states continue to register high unemployment.

However, the sound bite from the Opposition is that the gap between those making good money and those at the bottom is growing despite the feel-good factor. 

The question that surely arises then is: why is the poverty level (real or perceived) on the increase? And can we sit down and take a more holistic approach to the incidence of poverty now that we have all the signs of a healthy economy.

It is true that we have not struck oil and there is no windfall to share, so we need to keep our feet on the ground before the budget master can splurge goodies. Especially given the burden of accumulated national debt. 

The next budget therefore cannot indulge in giving a golden jackpot in an attempt to plug all the holes in our social fabric. But nevertheless an altruistic approach is called for to measure the number of persons falling into the poverty trap – whether real or perceived. Surely empirical data can be gathered using independent surveys commissioned by government to measure this creeping phenomenon. 

In this new age of heavy investment in data capture and a swanky new information building with superlative tools, there are increasing calls for economists and statisticians to roll up their sleeves and run a few mathematical models to discover the true incidence of poverty here. 

One place to start is the massive leakage of early school leavers who gained no formal education and yet are still expected to earn a decent wage. Especially nowadays, when that is clearly harder than ever, since employers demand higher technical qualifications to meet raising competition and digital competency.

The Opposition complains that minimum wage is too low to sustain a breadwinner - unless he/ she does three jobs on the hop. 

Others maintain that if the minimum wage goes up even slightly, then sectors making heavy use of low skilled workers will suffer reduced profits and start shedding workers. This is therefore counterproductive and in fact adds to poverty levels, they say. According to media reports of comments made by Finance minister Edward Scicluna at MCESD this week, minimum wage adjustments will not directly improve poverty levels because many people who fall beneath the poverty line are in fact unemployed or pensioners. 

So does this mean that the social benefits paid to thousands on the dole and the average pension levels have no link to the minimum wage? 

It is a fact that changes in cost of living have been indexed on a basket of household expenses and the Cost of Living Adjustment (COLA) mechanism automatically increases minimum wage to reflect any upward movement in inflation. 

The finance minister contends that in his opinion why look a gift horse in the mouth...the COLA mechanism is a social contract that worked perfectly for sixteen years and there is no pressure to change it. However, the Association of pensioners disagree saying that a revision is overdue of the content of the items used in the basket of household expenditure.

Not surprisingly General Workers Union (GWU) presented a proposal for an increase in the minimum wage, but only by way of an additional top-up from the government instead of across the board. 

On the contrary, it is not easy to persuade employers to jack up minimum wage unless this results in higher productivity. Otherwise the consequences can be reduced competition in the export market. Is the generation of new wealth high enough to afford us to be this profligate? Not so fast. Unless there are concrete signs of overheating in the economy there is no justification for higher taxes to compensate for generous welfare handouts to low-income workers and pensioners.

Caritas Malta recently presented to the authorities a study titled: “A minimum essential budget for a decent living”. This 2016 study is not about the minimum wage, but rather conducted with the aim of establishing a minimum budget for a decent living, focusing on three low-income household categories. 

In a nutshell, this document claims poverty is on the decrease. It still persists, but it’s much less of a problem now than it was before 2012 – the time of their last report. Caritas proposed that the minimum wage should increase gradually, but the Opposition took this to mean that poverty was on the increase and that the government had therefore lost its social conscience.

Both Prime Minister Joseph Muscat, and Alternattiva Demokratika, reacted positively to a report which found that the minimum wage was too low. Dr Muscat said proposals for a gradual increase in the minimum wage and a study on income adequacy had been noted and he welcomed debate on these important issues. But the Nationalist Party said: “The most troubling thing about this report is that the rising cost of living is affecting the poorest far more than the government’s official statistics suggest”.

As usual, there is no consensus among the two political parties on the conclusions of the study as each gave contrasting interpretations. None the less, one has to observe that while this report is based on studies taking into consideration novelties such as smart phones, it strangely left out important benefits such as free child care, no out-of-stock medicine, free tablets, higher ceiling for non-taxable income and in-work benefits, which are important cost saving initiatives introduced by this administration.

The methodology used three types of family structures. This included a couple with two children living on a minimum budget of €11,446; a family including a single parent with two children on a minimum budget of €9,197, and an elderly couple aged 65+ with a minimum budget of €6,527. 

Taking a flashback to the 2012 study, Caritas may be surprised how the cost of living fluctuates. While current inflation is modest, in 2012 it registered a 16% increase in food items. And yet in the 2012 study, the recommendation to increase the minimum wage was not considered favourably by the Gonzi administration.

However, one has to take into account that during the Gonzi administration, there were high annual deficits (over 3%) plus warnings that unless this was remedied, it was about to place the country under an Excessive Deficit Mechanism.

To conclude, SME’s constitute the bulk of employers in Malta and consequently they carry a fair share of tax burdens. So the GRTU objects to further unsustainable increases in public expenditure saying that it is the responsibility of the state to provide a living wage to all able bodied individuals of working age within their specific trainable skills potential.

Also the Malta Employers association supports all government schemes that ensure sustainable improvement in gross domestic product reflecting the benefit of enhanced productivity. It would therefore be appreciated if the Competition authority comes to the rescue and undertakes independent studies to measure the true incidence of low-income workers and pensioners susceptible to slide into the pernicious poverty trap. 

Because once they slide deep into the abyss, we will find it hard to hear them sing the praises of an economy firing on all cylinders.

George Mangion is a senior partner of an audit and consultancy firm, and has over twenty-five experience in accounting, taxation, financial and consultancy services. His efforts have seen that PKF has been instrumental in establishing many companies in Malta and placed PKF in the forefront as professional financial service providers on the Island.

George can be contacted at [email protected] or on +356 21493041.