Inflation refers to a general increase in the price of goods and services over a period of time, usually a year. It is measured as a percentage increase from a previous level. According to the budget handed down by the government last week, inflation is expected to be about 5.5% in 2015. This means that prices will be that much higher than they have been in 2014.
Inflation affects different people in different ways. I would like to discuss how inflation will affect salaried people in general and public servants in particular.
People who work for salaries and wages earn set fortnightly incomes. What they receive is fixed over a year, and sometimes for 3 or more years. With a given income, they buy a certain basket of goods and services to maintain their living standards. Depending on their standards and costs, some people save money consistently while others find that they cannot save anything at all. Most working people find that money runs out before the next payday comes around.
When the prices of goods and services increase, working people find that they cannot buy the same quantity or basket of goods as they could do previously. They need to spend more money in order to maintain their living standards. Many times they are forced to go for lower quality goods.
To understand the effect of inflation more clearly, let us take the simple example of a packet of 1 kg Trukai rice which costs K4.50 in 2014. With inflation of 5.5% in 2015, the same packet of rice will rise by K0.25, taking the total price to K4.75. A housewife would need 25 toea more for every kilogram of rice she purchases for her household next year. If it is a 10 kg bag for a family for a fortnight, the housewife would spend K2.50 more for each bag or K65.00 [K2.50 x 26 fortnights] over the course of the year.
Inflation is usually seen as an increase in prices, and it is, but it can also be seen as a decline in the value of money against goods and services. Taking our 10 kg rice example, we see that the bag of rice remains the same while the amount of money needed to purchase it increases. What this effectively means is that money has fallen in value against rice, so more of it is needed to buy the same quantity of rice.
The same can be said for all the other items a family buys. When added together, a family will need so much more to maintain the same basket of goods they were buying, and therefore their quality of life, than they were doing previously. It is also the same as them experiencing a pay cut.
The government has budgeted for a 7.5% increase in public servant salaries and wages in 2015. This sounds like a significant pay rise, but when inflation of 5.5% is taken into account, the real rise in income will be only 2%. And that is if inflation is 5.5% as predicted. The reality might be that prices rise higher than 5.5%, in which case the real rise in income might be less than 2% or even be negligible.
Another issue is income tax. The pay rise will definitely change the tax brackets for which income tax is calculated, and it is most likely going to mean increased taxes for a lot of workers. It will effectively be like the government giving the workers a pay rise on the one hand, and giving itself a pay rise on the other. When we consider goods and services tax of 10%, it might be the case that the government takes back more than it gives to its workers.
So the 7.5% pay rise may look impressive, but when inflation and tax are considered, it will not mean much for working families.
The purpose of this article is not to belittle or downplay the pay rise the government will be giving to its hard working employees next year. Everyone will agree that given the high costs of living, any increase in income is a welcome relief for struggling workers and their families.
What I do like to point out is the need for prudence on the part of the wage earners. Prices are expected rise by at least 5.5% in 2015; and they will continue to rise in the years to come because inflation is one of the necessary consequences of economic growth, development and progress.
The message to government workers is this: The 7.5% pay rise is a one-off event which will not be repeated. Gone are the days when compensation was provided every year for higher prices. When prices rise again in 2016, this pay increase will get wiped out completely. Income tax and GST will aggravate the depletion of workers’ incomes and living standards even further.
What workers need to do is to manage their lives and habits, and hence their money, more wisely than they have done up to now. In plain terms, the times for throwing money around are well and truly over.
It is time for every working class family in the country to tighten their belts, so to speak. It is time to shed bad habits like chewing betel nuts, smoking, gambling, drinking and borrowing unnecessarily. It is also time to do away with a lot of the out of date and expensive customary practices which are a major burden on workers in 21st century PNG. It is time for each family to set financial goals, develop budgets, live below their means, save and invest.