Helping families weather inflation

Understanding the additional mechanism against inflation: While the standard COLA is an addition to wages and social benefits, the additional COLA is a benefit in its own right. Its calculation, although somewhat inspired by the one underpinning the standard COLA, differs in important respects.

It’s always a good idea to double-check one’s facts before publishing anything.

In its editorial, The Malta Independent on Sunday implied that the fact that the number of beneficiaries of the additional cost-of-living adjustment (COLA) mechanism introduced in the Budget 2023 and confirmed in the Budget 2024 went up from around 50,000 this year to 95,000 next year “means that the number of families in great financial distress has more than doubled in one year”. This claim was repeated mindlessly by the Opposition Leader, Bernard Grech, yesterday night in his Budget reply speech.

Leaving aside that data on poverty is only available till 2022, and not for this year, the available data shows that, in 2022, the proportion of people at risk-of-poverty declined. Moreover those in severe material deprivation fell by 2,000 persons. The number of those not able to face unexpected financial expenses also fell by some 800 persons.

How does the additional COLA mechanism work?

Last year Government introduced an additional mechanism against inflation. While the standard COLA is an addition to wages and social benefits, the additional COLA is a benefit in its own right. Its calculation, although somewhat inspired by the one underpinning the standard COLA, differs in important respects.

Firstly, the standard COLA uses the consumption basket of the average family. On the other hand, while using the same exercise as the standard COLA – that is the Household Budgetary Survey – the additional COLA looks instead at the consumption basket of those on low incomes and of retired persons. In this way, it gives more weight to basic items such as food and medicines than it does to other items such as recreation and communications.

Research by the Central Bank of Malta published about two years ago indicates that inflation tends to be higher for lower income groups, as food and medicine prices tend to rise by more than those of other items. In more recent times, when food and medicine prices have increased sharply, this factor has become even more important.

What are the eligibility conditions?

This year, the additional COLA mechanism affected some 50,000 families. It has mostly gone to families with children, as the benefit was worked out on the basis of family size and on whether the family had already received a COLA. In this way, many pensioners were left out as they had received increases much more than the COLA. Moreover, although in theory the benefit was open to all those earning less than the median national income, the way it was calculated meant that only those on the lowest incomes could access it. In fact, analysis published in the Draft Budgetary Plan showed that this benefit had gone mostly to those in the lowest decile of the income distribution and, to a smaller extent, to the second lowest decile.

In the latest Budget, unveiled last week, Government announced an easing of the eligibility conditions of this benefit. As originally suggested by stakeholders, the computation of the benefit started to focus on the different baskets of consumption. This meant that, instead of seeing whether a household’s income had increased or not by more than the COLA, the focus was on whether the COLA for affected groups should have been higher or not. As a result, eligibility nearly doubled to 95,000 families.

The scheme has spread to the middle class

But, leaving aside this, the additional COLA mechanism now has an allocation of €26 million, which makes it as strong as that of the tax refund and stronger than the in-work benefit. Like the in-work benefit, a scheme at first intended for low-income households has now spread to the middle class. The in-work benefit is now open to households earning up to €50,000, while the additional COLA benefit can go to households earning nearly €40,000, depending on family size.

The rate awarded this year is €2.91 per week for families on the poverty threshold. For those earning below the threshold, this rate can be multiplied by a factor of 2.5, that is it can be up to €7.28 per week. For those earning more than the poverty threshold it would be lower, with the lowest rate set at €1.75 for those earning the national median income. For anyone earning more than the national median income, no benefit is granted.

The relevant rate is then multiplied by the number of persons in a family. Thus, for instance, a widow(er) with an income below the poverty threshold would get €7.28 per week, while a four-person household on the national median income would get €7 per week.  A pensioner couple on the poverty threshold would get €5.82 per week. These benefits are non-taxable and additional to the COLA awarded to these persons.

The tables below gives an idea of the amounts involved in this benefit

Couple

IncomeBenefit awarded
€10,000€467
€15,000€319
€24,000€212
€27,000€191

Single parent with two children

IncomeBenefit awarded
€10,000€825
€12,000€701
€18,000€478
€28,000€318

Couple with two children

IncomeBenefit awarded
€14,000€935
€19,000€712
€24,000€576
€38,000€382

Of course, these examples are not exhaustive, and the value of the benefit can range from €100 to €1,500, depending on income and household characteristics. To give an idea, a widow(er) earning €16,000 would get €100, while a one-earner family on the minimum wage with three children would get €1,500.

What is sure is that this benefit is a welcome addition to the government’s arsenal of tools to combat inflation and protect families.

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