Work in progress: The Bill gives companies hefty tax incentives to employ young people.
After three years of acrimonious debate, which, lest we forget, spilled on to the streets of Johannesburg and led to clashes between Cosatu and Democratic Alliance supporters, the treasury released the Employment Tax Incentive Bill last Friday.
Past fisticuffs aside, the proposed tax incentives, designed to boost youth employment, have already garnered criticism — and only cautious support from some of their most ardent advocates.
Civil society economists were quick to question it. Dick Forslund, at the Alternative Information and Development Centre (AIDC), said the Bill presupposes that South African wages are too high and the labour market too inflexible, and it represents the worst kind of concession to big business.
So did its long-time proponents such as the Democratic Alliance, who, while welcoming it, believe this proposal is inferior to the treasury’s original 2011 policy document, Confronting Youth Unemployment: Policy Options for South Africa, which has languished at the National Economic Development and Labour Council (Nedlac).
The reaction from Cosatu, a formerly vociferous critic, has been somewhat muted. In response to the Mail & Guardian’s questions, its spokesperson, Patrick Craven, said the trade union federation is still studying the document to determine how different it is from the DA’s proposal, which Cosatu is “heavily opposed to”.
But Craven could not say how the Nedlac talks had proceeded or whether the social partners had reached consensus, although the treasury maintains the incentive’s design was an outcome of consultation with numerous parties, including the Nedlac constituency.
Busa welcomes the plan
However, Business Unity South Africa welcomed the plan, saying it would “reduce the cost of hiring inexperienced youth”, and the amount of the incentive.
It said that, with successful implementation, these amounts could be “revisited for a bigger impact”.
According to the treasury, the incentive decreases the amount of tax that is paid by an employer to the state under the pay-as-you-earn (PAYE) system.
Employees who qualify must be between the ages of 19 and 29, possess a South African ID and earn no more than R6 000 a month.
In a sector where no minimum wage has been set by a sectoral wage determination or a bargaining council agreement, the minimum an employee must earn to qualify for the incentive is R2 000.
Employers who don’t comply with sector minimums will not receive the incentive.
Governing formula
The incentive is governed by a formula that operates at three different wage levels.
For monthly wages of R2 000 or the prescribed sectoral minimum, the incentive value is 50%.
For monthly wages ranging from R2 001 to R4 000, the incentive is R1 000 a month.
For wages between R4 001 and R6 000, the incentive ranges from R1 000 a month to zero.
After the first year, the incentive value is halved and the employer cannot deduct more than the total amount of tax that is owed to the South African Revenue Service through the PAYE system, according to the treasury.
The tax break will run for two years. In the as-yet-to-be-established special economic zones, there will be no age limit on employees. Domestic workers do not qualify.
Reason for large unemployment
Forslund has long argued that the reason for large youth unemployment is because South Africa has a predominantly young population and not because the country’s youth are less attractive to employers.
In an article published by Business Day last year, Forslund said that the wages of young workers of between 18 and 29 are already discounted by roughly 20% and a youth wage subsidy will double the reduction.
Forslund used Statistics South Africa’s most recently published monthly earning report, released in 2010.
Figures from Stats SA illustrating the distribution of monthly earnings for employees by age show a similar pattern in more recent data for 2011.
Median earnings for workers between 18 and 29 were about 25% less than earnings for workers between 30 and 64.
The Bill is a “gift to employers” in a country where local industry is among the most profitable in the world, Forslund said.
Danger
Also there is no concrete evidence internationally that these kinds of incentives work, he said.
There is also the danger that it will put downward pressure on overall wages in the labour market, reducing workers’ buying power and leading to a decline in domestic demand, which will ultimately harm economic growth.
It may make a dent in unemployment for young workers but he fears it will see the displacement of older ones as bosses pursue the cash.
Although the Bill includes sanctions for employers who do this — the repayment of 150% of the incentive and exclusion from future participation in the scheme — Forslund doubted that the government can effectively enforce it.
The treasury said the Bill gives effect to the commitments made by President Jacob Zuma in his 2010 State of the Nation Address and the National Youth Accord signed earlier this year under the aegis of Economic Development Minister Ebrahim Patel.
The accord gave the nod to an incentive, stating that the parties supported “incorporating appropriate support measures and incentives to ensure increased youth absorption into the economy and in training”.
Risky hire
However, it is meant to be part of a package of mechanisms aimed at spurring youth employment, including the expanded public works programme.
Treasury spokesperson Jabulani Sikhakhane said a key reason for high youth unemployment is that young people “are less skilled, have low levels of education and work experience, making them a risky hire for prospective employers”.
The 2011 policy document was a response to this problem and received comment from a “wide range of groupings, including community organisations, organised business, individual employers and trade unions”.
He said the proposed design of the incentive is an outcome of consultation with and feedback from stakeholders, including the Nedlac constituency.
But, for others, the proposal does not go far enough. The DA spokesperson on finance, Tim Harris, said the incentive is inferior to the proposal set out in treasury’s 2011 policy document, which formed the basis of the talks at Nedlac.
"Crazy"
For a start it excluded existing workers, and the effective minimum of R2 000 in sectors with no sectoral determination of bargaining council agreement is “crazy”, Harris said. “It excludes the people who most need to benefit from it.”
Capping the benefits at the total PAYE liability of a company is another problem, he said.
It risks undermining the benefits for labour-intensive companies that employ a large number of qualifying young people, who might fall below the PAYE threshold, but have fewer managers who fall above the threshold and against which a company can claim the offset.
But the very real question is whether the Bill will be passed through Parliament.
The country is months away from elections and preparations for them are eating into the time of ministers and MPs.
Parliament has a slate of difficult pieces of legislation to pass, including the contentious changes to the country’s mining laws. After elections, a new Parliament is constituted — and Bills expire.