The additional mechanism to counter the effects of inflation | Mark Musu

In 1990, a social pact had resulted in the setting up of a COLA mechanism. The latter involved an agreement that every year, the so-called social wage would be increased in line with the increase in the cost of an agreed basket of goods and services.

This basket is based on the Household Budgetary Survey, and represents the consumption pattern of the average family.

However, while the COLA mechanism has been very effective in calming the industrial relations landscape, some had argued that it was not fine-tuned to the needs of those on lower incomes. The reason for this is that the consumption basket of those on low incomes and of groups such as pensioners varies from that of the average family.

Research by the Central Bank of Malta confirms this. An article published about two years ago1 indicates for instance that the importance of food in the consumption basket is 30% for lower-income households and just 20% for the average family. As for medicines and care, these make up around 15% of the budget of retired persons, as against less than 9% of the average family.

This is important as if inflation is exceptionally high for food or medicines, the implied impact on the budget for an average family would be much lower than that felt by a low-income or retired household.

To address this issue, Government introduced an additional mechanism on top of the COLA one in the Budget for 2023. In this year’s Budget, Government announced changes in the eligibility of this mechanism.

As a result, this benefit will be received by 95,000 families, almost double the amount that were eligible this year.  The allocation for this social programme will amount to €26 million, the same as the tax return scheme and €10m more than the in-work benefit as extended.

The additional mechanism is geared towards households with an income that does not exceed the equivalised national median income. For a single-member family, for example a widow, this amounts to €18,155. A family with two members, for example a pensioner couple, to be eligible can have an income of up to €27,233.

A three-member family, for example a couple with one child, can have an income of up to €32,679 while a couple with two sons, can have an income of up to €38,126.  All these will qualify for this additional benefit.

To calculate the rate of this benefit, Government looks at how different the inflation rate for those on low income is compared to that of the average household.

This is done by calculating how much the price of the basket of goods and services consumed by those on low incomes has changed, and how much the COLA would be if this rate of inflation is used instead of the standard one.  Over the two years that this mechanism has been in place the difference amounts to an addition of €2.91 per week to the standard COLA.

The amount received by eligible families depends on two factors: how much the household’s income compares to the poverty threshold and how many members there are in the household. The first factor means that the lower the income the more the benefit, while the second implies that the more persons there are in a household the more the benefit will be.

For example, if a single person earns up to €4,357 (40% of the poverty threshold) the benefit of €2.91 per week is multiplied by a factor 100/40, or by 2.5. In contrast, for a single person with an income of €18,155 (167% of the poverty threshold) the benefit is multiplied by a factor 100/167, or of 0.6.

After this adjustment, the adjusted rate is multiplied by the number of persons in the family. The benefit can range between €100 and €1,500 per family.

To better illustrate the yearly pay-outs arising from the upgraded mechanism, the accompanying tables  comprise examples of how various households would fare.

These benefits are non-taxable and additional to the COLA awarded to these persons. Estimates published in the Draft Budgetary Plan for 20241 indicate that the additional COLA awarded last year (which was 40% less than the allocation awarded this year) led to a decline of 0.4% in the population at risk of poverty.

Given the substantial increase in the allocation and the doubling of the eligible population, the impact of the programme this year is projected to be much more pronounced.

The entitlements will be split in two six-monthly payments, the first in December 2023 and the second in May 2024.