Friday, 30 October 2009

Cola Hard Choice

Cola Hard Choice

30th October 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

Whenever the Prime Minister makes a heartfelt appeal for yet another attempt for a social pact, then as sure as night follows day, continues that government is facing hard choices, the burden for which should ideally be shared out with the rest of society.

On the eve of presentation of the Budget for 2010 nothing presents a harder choice than the cost of living increase to be legally mandated through the out-dated Cola mechanism which has grossly outlived its purpose since it was introduced in the early 1990s.

To an outsider it probably seems odd that wage setting forms part of the public budget which itself is the main tool of fiscal policy. Budgets should deal with government expenditure, government revenues and the difference between the two and how such difference, which is normally on the negative side, is to be financed.

This on its own presents enough headaches to whoever is putting together a budget in a harsh economic environment which has depressed consumption for reasons beyond any government’s control and has shrunk the normal sources of fiscal revenues just at a time when automatic stabilisers triggered increasing social expenditure and subsidies.

In reality, the government has a basic but simple choice. It should place economic growth over budget deficit control and should take measures to ensure that the economy does not experience another bad year following the disaster of 2009. The government should not feel committed to meet any particular deficit figure for 2010 as the EU seem to expect and should let the deficit increase as necessary provided the expenditure goes into fruitful investment and not unsustainable consumption.

Equally the government should not feel committed to pre-electoral pledges. Promises made before the financial collapse of 2008 can hardly be considered binding in a world that is financially falling apart and in the midst of a recession which is likely to be deep and long. Obviously politicians will continue playing games with cheap demagoguery but leaders should rise above cheap party politics and do what is right for the country.

Leaders should take the electorate into their confidence, communicate effectively that suddenly the world has shifted from a growth trajectory to an environment of mere survival, relate the morass which is afflicting the citizens of US, UK, Ireland, Iceland, Hungary Latvia et al, and explain how we need to go through this hard period without blindly feeling straight-jacketed by promises made in a different world. Alfred Sant’s experience in obstinately persisting with the promise to dismantle VAT even though he inherited a budgetary financial crisis which was not at all evident when the promise was made, should not be forgotten.

Cola is however a different matter altogether. Although we have now embedded Cola into the budgetary process it does not merely affect our relationship with government like decisions involving taxes and subsidies do.

It affects the relationship between one sector of society with another. It affects how much wages employers should pay their employees irrespective whether they are affordable, justified by efficiency gains or otherwise.

Government argues that the Cola mechanism has brought industrial stability. I doubt it, but even if it did, just see where it has landed us now. In the midst of a recession when the risk of deflation is much more real than the risk of inflation, so much so that we are living with record low interest rates which will likely remain stable for a considerable time, the Cola mechanism has produced a proposed wage increase of e6.06 per week just at a time when competitor countries are forcing wage cuts and other drastic measures in a desperate effort to survive the crisis rather than be ‘Icelanded’ by it.

So on one hand employers, especially those whose fortunes depend on export markets (which includes our hotels and related tourist outfits) are sending serious warnings that such mandated wage increases in the midst of a recession will bowl them over and force them to either re-size or relocate. This will inevitably lead to higher unemployment and economic contraction at a time when growth and job creation should be our priorities.

On the other hand employees expect that a mechanism that has tended to work against them in the past should be sustained now that it is working in their favour mostly because government suppressed prices in the period around the March 2008 elections and then these prices snapped back with vengeance in the period after June 2008, once subsidies and price controls were lifted. It is such release from price repression that is being captured by the Cola mechanism that produced the e6.06 proposed increased. The unions can hardly be expected to make any unilateral gesture for national interest without losing their own significance in the eyes of their members.

If government really means to give substance to its calls for a new social pact it is pretty obvious that both employers and unions are going to shout ‘show us the money’. And I can see a valid cause for government to enter into the equation by taking onto itself a slice of the burden of the Cola increase as a one-off measure provided the social partners agree to dismantle the Cola mechanism and put back future wage setting where it belongs, in direct negotiations between employers and unions.

Obviously the government will keep a foot in the process firstly as a direct employer and secondly in the guardian of our social policy in regularly adjusting the national minimum wage to protect non-unionised employees.

Employers should be keen on such an arrangement as it gives them control over their costs. Unions should not scoff at it either. The Cola mechanism has usurped their role in wage setting and has reduced the incentive for union membership once wage increases get legally mandated rather than freely negotiated. But the real winner would be the general economy as it removes an inflexibility which is prejudicing our international competitiveness.

It’s time to move out from being trapped between a rock and a hard place

No comments:

Post a Comment