Issue link: https://maltatoday.uberflip.com/i/1510993
20 maltatoday | SUNDAY • 5 NOVEMBER 2023 BUDGET2024 IN 1990, a social pact had re- sulted in the setting up of a COLA mechanism. The latter involved an agreement that every year, the so-called so- cial 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 consump- tion pattern of the average family. However, while the COLA mechanism has been very effective in calming the in- dustrial 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-in- come 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 av- erage family. This is important as if infla- tion is exceptionally high for food or medicines, the im- plied impact on the budget for an average family would be much lower than that felt by a low-income or retired house- hold. To address this issue, Gov- ernment introduced an addi- tional 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 na- tional median income. For a single-member family, for ex- ample a widow, this amounts to €18,155. A family with two members, for example a pen- sioner 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 addi- tional 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 av- erage household. This is done by calculating how much the price of the basket of goods and services consumed by those on low in- comes 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 el- igible 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 ben- efit, while the second implies that the more persons there are in a household the more the benefit will be. For example, if a single per- son 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 sin- gle person with an income of €18,155 (167% of the poverty threshold) the benefit is mul- tiplied 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 year- ly pay-outs arising from the upgraded mechanism, the accompanying tables com- prise examples of how various households would fare. These benefits are non-tax- able and additional to the COLA awarded to these per- sons. Estimates published in the Draft Budgetary Plan for 20241 indicate that the ad- ditional 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 in- crease in the allocation and the doubling of the eligible population, the impact of the programme this year is pro- jected to be much more pro- nounced. The entitlements will be split in two six-monthly payments, the first in December 2023 and the second in May 2024. Mark Musu' is the Permanent Secretary of the Ministry for Social Policy and Children's Rights Mark Musu' The additional mechanism to counter the effects of inflation 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