Economists and trade unions against UIF holiday

Economists and trade unions are arguing that the treasury should kibosh its suggestion to grant businesses and employees a one-year reduction in Unemployment Insurance Fund (UIF) contributions.

This follows a proposal by Finance Minister Nhlanhla Nene in his February budget speech that there be a “temporary relief” in the payment of UIF. He proposes to drastically reduce the remuneration threshold against which the 2% UIF contributions are calculated for one year. The net effect would be to bring down the monthly UIF payments from a maximum of R149 a month to a maximum of R10 a month for employers and employees. Benefit payments would remain unchanged.

The treasury made the proposal as a way to draw down on the fund’s accumulated surplus of R90-billion. It is not clear why the surplus is so large. Some analysts say it is because UIF benefit payments are too small, but others say the fund makes it overly difficult to claim. Still others feel it is because those who can afford to pay UIF do not need to claim the money and are instead sustained by superior corporate benefits.

But, according to the treasury, the tax break would “provide much-needed support to the economy, putting about R15-billion back into the pockets of workers and employers”.

Alternative methods
However, analysts and workers’ representative groups are against the idea and say other methods should be used to help the unemployed.

“I think the solution being proposed is unsatisfactory for everybody,” said economist Mike Schussler. “I’m never one for arguing higher taxes but we need to make sure that tax works for people.”

He proposes that workers should continue contributing to the UIF at the same rate but that the benefits of the programme should be increased.

“It would be more beneficial to increase the percentage of the payout and the number of months that people receive the benefits,” he said. Take for example, a “single-headed household where a mother earns R6 000 a month. Now she loses her job and she’s getting just R2 000 for only eight months. It would make a difference to her if instead she was receiving R3 000 for a year.”

Currently, those who are unemployed due to retrenchment, illness or dismissal can receive eight months’ payments at roughly 40% of their salary (with a maximum threshold limit of R14 872). Maternity benefits can be claimed for four months at roughly 40% of the salary.

Low fees
Although the usefulness of the fund is also being contested, South Africa’s UIF fees are comparatively low, according to Schussler.

“When you compare South Africa’s personal income tax and our company income tax with the rest of the world, ours is very high,” he said. “But when you compare our UIF, our social security tax, it’s very low.”

Trade union federation Cosatu takes a similar view and said it “strongly rejects” the treasury’s plan for a tax holiday. “UIF taxes are deducted from workers’ salaries. This is workers’ hard-earned money not the treasury’s private fund,” it said in a statement.

“A UIF with such a massive surplus coexisting with crisis levels of unemployment is a scandal. This should be dealt with not by reducing contributions but by substantially increasing benefits, and the numbers of unemployed covered by the UIF … The priority should now be how to expand access to the UIF and not to give business a tax holiday.”

Discussions about the extension of UIF benefits have already been under way for more than a year under the guise of the UIF Amendment Bill, which outlines changes such as:

• Extending the period of payment of benefits to the contributor from eight to 12 months;
• Increasing the period in which a contributor can lodge a claim (from six months to 12 months);
• Increasing maternity leave benefits to 66% of the salary and extending it to domestic workers, who were previously largely excluded;
• Providing for the nomination of beneficiaries in case of death;
• Assisting in financing the Public Employment Services’s projects; and
• Giving the minister of labour the power to vary the income replacement rate.

The Bill was debated by the National Economic Development and Labour Council (Nedlac) in November 2013 and was approved by the Cabinet more than a year ago.

Cosatu has accused the treasury of stalling its progress. “This Bill has … been delayed for more than a year at the National Assembly. We have been led to believe that this unheard-of delay … is due to treasury’s opposition to expanding UIF benefits for workers and its desire to have the UIF transferred to treasury’s control.”

The treasury has not responded to the remark publicly, but a few days after the budget speech, the finance minister invited public comment on the proposed UIF tax holiday and undertook to discuss the matter at Nedlac. This week, Nene extended the deadline for submissions to April 20. The treasury has received 44 public submissions on the matter, with additional submissions from Nedlac constituencies.

Flawed tax
Loane Sharp, an economist for the Free Market Foundation, said the tax should be done away with entirely. “The first question is: Why is the UIF sitting with such a tremendous surplus? The answer is that the people who are entitled to UIF benefits don’t need it, and the people who need it are not entitled to it.”

The fund requires that a working person should contribute to it for at least two of the preceding four years before claiming.

“The UIF should be abolished,” Sharp said. “It’s an unnecessary payroll tax on employers. When we add up all the taxes that are funding dysfunctional funds such as the UIF, it makes up 17.9% of total employment payroll costs. Imagine the increase in employment that could take place if we cut 18% off the payroll costs of the employer.”

In Sharp’s opinion, the proposals about extending the benefits of the UIF were “a red herring”.

“In every case where the government raises payroll taxes, it does not have the capability to distribute the benefits,” he said. “I hope that this tax holiday is a movement towards abolishing the programme.”

But not all analysts view the proposal in a negative light. Efficient Group economist Dawie Roodt said the treasury’s plan was sensible and would re-establish the fund at its optimal levels. “Theoretically, the UIF should always be zero,” he said. “We shouldn’t be building a surplus there, and we shouldn’t have a deficit there for that matter either.”