A large post Budget surprise (though no relief for the workers in the form of UIF contributions) and other unintended consequences of it.
National Treasury was faced with a problem ahead of this year’s Budget: the Road Accident Fund was running a huge deficit while the Unemployment Insurance Fund (UIF) was running as large a surplus. And so the 2015 Budget proposed to take more than R10bn from the economy through higher taxes on petrol, diesel and paraffin while giving back to employees and employers in the form of significantly lower contributions to the UIF.
But now, most unusually, the Budget was anything but the final word on the matter as it almost always is on tax matters of this large order of magnitude. The government, in its wisdom, now intends to dispose of its taxing power otherwise. Contributions to the UIF will continue as before adding an extra R15b to government revenues.
To quote the Minister of Finance Nene, as reported in the daily media, the step was taken for fear of “unintended consequences” and to allow for further consultations. What these unintended consequences may be is not indicated and clearly escaped the Treasury when it drafted its Budget, a process that presumably takes much official effort and time and many a consultation. Another of the unintended consequences of the decision to reverse course will be to undermine the value of the Budget proposals themselves – until now regarded by businesses and households affected as a done deal rather than the opening of negotiations.
Incidentally the most important item on the expenditure side of the 2015 Budget was also left unresolved by the time the Budget was presented in February – the sum of tax payers’ contributions to the employment benefits of public sector employees (of which wages and salaries, after taxes and social security and pension contributions are only the largest but seemingly most visible part to those receiving and paying for the benefits). We can only hope that the decision to take more in the UIF contributions from the lower income average SA household with members in formal employment in the private sector is unrelated to unintended further generosity to public sector employees. These public sector employment benefits already compare more than favourably to those employed in the private sector. This is especially so when the very low risks of unemployment and defined benefit pensions related to final salaries, almost only provided by the public sector, but also guaranteed by the hard pressed taxpayers, are factored into the calculation of comparative employment benefits. Little wonder then that working for the government is much the desired objective of the majority of entrants to the labour market out of the schools and universities.
But a proper think on the role of social security contributions or the so called payroll taxes in SA is called for. They play a very small role in the overall tax structure compared to tax structures in the developed world. By comparison, SA relies much more heavily on income taxes collected from companies (or rather their shareholders), than employees in the developed world. Social Security, or what may be called National Insurance Contributions, can easily amount to 15% or more of the salary bill. This helps pay for the significant benefits received from their governments by the average household in medical benefits and pensions etc.
The scope in SA for raising additional income tax from companies or individuals is clearly limited. Higher income or expenditure tax rates may well lead to lower revenues collected, which is counterproductive both from the perspective of SARS as well as highly damaging to growth in employment, output and pre tax incomes. It is also not good tax policy to tax some expenditures, for example on energy (including electricity), at much higher rates than expenditure in general. It distorts expenditure and production patterns in unhelpful ways. Taxes are ideally general and proportional, rather than specific and unequal, if economic growth is to be encouraged.
It would only be fair to the large ranks of the unemployed or the underemployed unable (because of regulation of the labour market) to gain access to formal employment, that the comparatively well paid insiders with decent jobs should pay more for what has become the privilege of formal employment. The important point about payroll taxes, such as the UIF contributions made by workers and their employers in SA, is that they largely represent a sacrifice of their wages or salaries or other employment benefits, for example contributions to medical insurance, even when the employer pays in the cash. The workers subject to a payroll tax would have very likely taken home more not only because their contributions would have been lower, but because their employers, in time, would have seen their savings as a reason for paying higher wages or providing other benefits that help retain actual and potential employees whose sought after skills may be in short supply. Payroll taxes are largely a tax on workers (not their employers – something they would be well advised to appreciate) and so they should demand that their sacrifices of take home pay are always put to good use.