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A DELICATE BALANCE
Publication of the latest increase in inflation to 7.6 per cent came as less of a
surprise than more of a confirmation of what many had been expecting. Some
of the causes of such a sharp increase in prices in the last twelve months were
foreseeable at the start of the year: interruptions in the global supply chain
following the Covid pandemic and a squeeze on the oil supply as factories and
businesses resumed full time operations after two years of start/stop production.
Russia’s attack on Ukraine may have been viewed as a possibility at the start of
the year, but the effects of its war have compounded the upward pressure on
prices. And the longer the conflict lasts the greater the likelihood that inflation’s
unwelcome return will become a longer-term fixture in everyday life.
The wholesale oil price is well below its all-time high but the prices of refined
product such as petrol and diesel have been hitting historic records in recent
months. The reason is that refining capacity in Europe is stretched, particularly
for diesel, and a lot of this has historically come from Russia. Locally the
Government has sought to ease the pain by reducing duty on fuel ahead of this
year’s budget. It has given some respite to drivers and to businesses but the move
will cut Government revenues at a time when it needs every penny.
The extensive set of embargoes imposed by Europe on the Kremlin has had
consequences for the whole of the EU: the upward pressure on prices of all
goods, but particularly fuel has to a great extent been self-inflicted. This was
probably all part of Putin’s plan with the calculation that the EU might complain
but would recoil from any serious measures against Russia for fear of provoking
a wider conflict.
Prices of goods have inevitably risen as well since Gibraltar is so dependent on
imported goods, either from the UK or increasingly from Spain or elsewhere in
Europe. As we commented in the Chamber’s Annual Report, local businesses
have been forced to pass on these price increases as their own financial reserves
have been pummelled by the last two years. They are now trying to rebuild their
finances so that they can plan for new opportunities and new investment. This
will take time.
It will come as no surprise that in the same way the Government is having to
be cautious about future spending plans. Over the last two years it has had to
borrow like never before to meet its budget commitments. Although much of
this additional borrowing has been at low interest rates it is due to be repaid
in the next two years. In the likely event that the debt is rescheduled it is likely
to be at higher interest rates. The Chamber understands the Government’s
position as many members share the same predicament.
With this in mind your board has written to the Chief Minister urging him not
to increase the costs of doing business in Gibraltar in the forthcoming budget.
Instead, it has suggested that the Government should look to achieve savings by
seeking increased efficiencies from various civil service departments.
Following last year’s sharp increases in social insurance, rates, electricity and
the minimum wage, local businesses have been looking to make efficiencies
and reduce costs where they can. In July this year the next, much larger tranche
of companies will be obliged to begin making pension contributions for their
employees.
If local businesses are to stand a fighting chance of adapting to the new trading
environment, either with or without an agreement with the EU, then they must
be given the time to rebuild their finances. If their costs continue to rise at rates
which reflect the much higher levels of inflation then they will be forced to
adjust their cost bases accordingly. The implications of that will be cuts in jobs
and a concomitant reduction in government revenues as well, at a time when we
can all least afford it.