SMEs – cut bureaucracy and expect better wages

Eurostat, the European statistical agency, defines micro-businesses as those employing fewer than 10 people and small enterprises as those employing from 10 to 49. Locally the NSO in its registers shows over 87,000 micro and small enterprises.

It is a regular question being asked whether this section of the business community can afford to pay better wages and in doing so remain competitive. 

Not all of these companies are necessarily profitable and many manage to scrape through due to personal sacrifices by owner-managers in their unpaid effort to reduce costs. Surely the latest political slogan by the Opposition to shower them with benefits of lower taxes (paying a mere 10% on the first €50,000 in profit, instead of 35%) may look quite enticing.

In fact, we find that countries such as Greece, Italy and Portugal have lots of small firms which, thanks to cumbersome regulations, have failed lamentably to grow and register adequate returns on capital employed. The official definition of SME includes firms employing up to 250 workers and in Malta they account for a majority of manufacturing jobs. Traditionally there are a limited number of big firms locally although the perception is that politicians gravitate towards them under the pretext that they are more stable and can afford to pay higher wages and better working conditions.

Really and truly, it is SMEs which work hard to maintain market share and unfortunately exporters get little tangible help from the government, although on paper there are a number of glossy brochures to introduce incentives, albeit in practice these benefits are too bureaucratic to interest the busy self-employed or managers of small firms.

If all SMEs claim benefit from the lower 10 per cent corporate tax proposal, as the PN is suggesting, the national deficit will again shoot up beyond the 3% of GDP and most likely we will land ourselves (as was the case in 2012) with another Excessive Deficit mechanism imposed by the European Commission. The impact of such a tax measure is foolhardy as it could derail our drive to reduce the annual deficit.

This unmitigated shortfall of about €350 million in annual government revenue will undoubtedly cause headaches for the finance minister as he will probably be forced to increase Vat to 23%. So if SMEs cannot afford to pay higher wages, then one may ask what kind of effective fiscal incentive will help them to become more innovative, earn higher profits and export more.

The answer is not easy and there are no quick fixes. But, certainly something must give since without a living wage people cannot survive in today’s competitive environment and consequently face the risk of sliding into a bottomless poverty trap.

Caritas studied the plight of the poor in Malta in late 2012 and again in 2015. It found that the same basic basket of goods and services (no car, no foreign holidays, only the very basics) bought by a typical low-income family of two parents and two children cost €811 more last year than it did three years before.

But in those three years, wages paid to lower-income groups increased nowhere near €811 a year; weekly increases of 58c and two of €1.75 come to just €212 a year. So those who were already at risk of poverty in 2012 went deeper into poverty by 2015.

Obviously, those who were just getting by are now in poverty.

What Caritas clearly found was that the real cost of living of the lower income groups increased by 7.6 per cent over those three years, while the government’s figures say that between late 2012 and late 2015 inflation was just two per cent.  The government itself studied real wages between August 2015 and last August.  It was an interesting exercise published in the Economic Survey with the budget and one may conclude that workers in the medium and lower income groups are not keeping up even with official inflation, let alone real inflation.

This is why a number of voluntary organisations in the field of social justice are quietly waging a campaign for a decent minimum wage. Naturally in Malta most unions wax lyrical about the need to achieve a fair income distribution policy. Some have argued that this has deteriorated over the years as inflation and annual deficits have taken their toll with the creeping increase of inequality which invariably undermined the social creed of a fair distribution of wealth, especially so among the lower income classes.

A debate over whether there should be an increase in the minimum wage has intensified in the aftermath of Budget 2017, in part fuelled by continuous pressure by the opposition which started a holy crusade to help the thousands of households that in the opinion of the shadow finance minister are struggling to make ends meet.  Caritas proposed that the minimum wage should increase gradually and the opposition were quick to say this means poverty is on the increase and that the government has lost its social conscience.

The dumb question is whether it is true that the number of people at the poverty level (real or perceived) is on the increase? Can we sit down and take a more holistic approach to the incidence of poverty, now that we witness early signs of healthy growth in our economic garden. It is true that we have not struck oil and there is no windfall to share so we need to be with our feet on the ground.

Budget 2017, did not indulge in giving a golden jackpot in an attempt to plug all holes in our social fabric but really and truly it succeeded to help those in the low income bracket. Surely the time has come to gather empirical data using independent surveys commissioned by all stakeholders at MCESD to measure this creeping phenomenon. The opposition complain that the minimum wage is too low to sustain a breadwinner (unless he/she does three jobs on the hop) remarking that real wages are on the decline, as not everyone works overtime or is paid a bonus – according to the PN. Bosses argue that if the minimum wage goes up then sectors making heavy use of low skilled workers will suffer reduced profits and may start shedding workers.

Surely this is counterproductive and exacerbates poverty levels. In fact, the media reported Finance Minister Edward Scicluna saying that minimum wage adjustments will not directly improve poverty levels as he thinks that many people who fall beneath the poverty line are in fact unemployed or pensioners. It is a fact that for many years changes in the cost of living have been indexed on a basket of household expenses and the COLA mechanism automatically increases the minimum wage to reflect any upward movement in inflation.

The finance minister contends that in his opinion why look a prize horse in the mouth... the COLA mechanism is a social contract that worked perfectly for 16 years and there is no pressure to change it. The association of pensioners disagrees, saying that a revision is overdue of the content of the items used in the basket of household expenditure to work out real cost of living indexes.

Not surprisingly the General Workers Union (GWU) presented a proposal for an increase in the minimum wage but not across the board but by way of an additional top-up from the government. So can the quest to offer a living wage help to turn the tide.

It is a way to show a more human face of capitalism. In the long run it will strengthen the system of a democratic society and make Malta more and not less productive. There are thousands of workers who earn the existing minimum wage, or close to that employed in the construction, hospitality and catering sectors, that is, they are working to produce goods and particularly services which are not internationally traded so higher wages will not affect exports negatively. Can these sub sectors in the business community be fiscally assisted to enable them to become more efficient and in turn afford paying better wages? 

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George Mangion is a senior partner of PKF audit and consultancy firm, which is in the forefront as professional financial service providers on the island