Glenda Daniels
A new employment-creation strategy to reward companies with tax breaks if they employ more workers will soon come under investigation.
If this idea becomes reality then it might be the first point of agreement between the government, business and labour on how to create jobs and encourage investment in the country.
This week President Thabo Mbeki said giving tax breaks to companies that employ more workers instead of using capital- intensive methods would be investigated by the Department of Finance as a possible option to address job creation in the country. The idea was mooted at a recent International Monetary Fund and World Bank workshop.
“The president has said that this is one worthwhile option to be investigated that would create investment and contribute towards job creation,” said Mbeki’s representative, Tasneem Karrim.
While the business community says such a move would be welcomed, an independent economist says theoretically it sounds good but doesn’t always work.
“Obviously we would welcome such an innovative move. There are costs
involved in doing business with an emerging market like South Africa if there is no strong employment strategy. Giving tax incentives to companies would be about reducing employment,” says Kevin Wakeford of the South African Council of Business.
He adds you don’t need to be a rocket scientist to work out that tax breaks would be beneficial when weighing up the risks of investing or expanding. “I think the trade unions would welcome this option, too.”
However, economist Dr Miriam Altman, who is a senior lecturer and programme manager of the economic policy programme at the Graduate School of Public and Development Management at the University of the Witwatersrand, says intuitively this sounds good, especially from the perspective that it is meant to favour more labour-intensive firms and labour-intensive technologies. However, her concern is that an across-the-board subsidy often has the effect of displacing permanent workers with temporary ones.
“The experience internationally shows that many firms abuse such a subsidy or tax break by getting rid of existing workers and hiring or even rehiring the same workers tempo- rarily. When so many firms can access it, the government has difficulty monitoring whether the subsidy is being used as intended,” Altman says.
She adds that firms make technological choices because of the impact of a techno- logy on productivity or product quality. This means that the subsidy would have to be very large to effect technology choice, “and if it were this large the jobs would be lost as soon as the subsidy were over as happened in the old bantustans”.
Although it makes sense to attract more labour-intensive investment, it does not imply that capital-intensive investments are not important, says Altman.
“They can be important creators of jobs, albeit indirectly. The investment in motor plants is a good example. One needs to distinguish between the large mega projects that often stand on their own and other projects that generate large spin-offs.”
A labour subsidy could be a good idea, Altman says, if it is tied to new investments and substantial expansions. In this way, the firm really does need to employ more people. The subsidy then makes it easier to do this. This is also easier for the government to moni-tor, to ensure that money is spent as intended.
Tax breaks miss a point in relation to small and medium enterprises. These can often bene-fit more from cash than from a tax break at a time when they are establishing or expanding. This is because cash flow can be a big stumbling block and so the majority of firms fail in the first two to three years. Firms receiving the cash support have a very low failure rate. At the same time, it can often take a number of years to achieve profitability, so the tax break kicks in a little late.