Money for Everybody. What Brings the Increase in Minimum Salary to ₴4,100?
President Petro Poroshenko has recently stated that the minimum salary In Ukraine can make ₴4,100 as soon as in 2018. Even though it sounds tempting, Ukrainian reality prevents us from branding it a step into the bright future. This issue is a double-edged sword.
What can we see now
In 2016, the Verkhovna Rada adopted a bill on increasing the minimum salary doubling it from ₴1,600 to ₴3,200. This led to peculiar consequences:
— The first disappointment from innovations came when people realised that 3,200 is the amount they get without the income tax deduction. After taxes, the employee would get much less – ₴2576. Against the backdrop of utility costs and product prices increasing, such increase in salary no longer seems significant.
— Increasing the minimum salary created problems for budget organisations. Their budgets were not increased, while the organisations were demanded to raise minimum salary. To replenish the budget, chief officers had to take various measures. Such as redeploying their manpower with minimum salary so it continues to work part-time. Other enterprises (private ones as well) had to cut their staff so as to pay the remaining officers the minimum salary required.
— The business, in turn, had to pay more taxes. It is the unified social tax (UST) we speak of that an employer pays for each salary paid. Now, with the minimum salary of ₴3,200 it accounts for ₴704.
— Doubling the minimum salary also added around 2-2.5 percentage points to inflation in 2017. These figures were presented by the National Bank of Ukraine. However, they clarified that in reality, employers were not expected to raise the real income of workers and it was rather the matter of dragging them from the shadow sector.
— Tax deductions from salaries increased, which is logical. According to the State Fiscal Service of Ukraine, the personal income tax (PIT) collected increased by 40% more and the unified social tax — by 20%.
— In turn, the Ministry of Economic Development and Trade reports a downturn in the shadow economy. It is that very trend that the President of Ukraine had referred to when he suggested increasing the minimum salary up to ₴4,100 in 2018.
Then we have an abnormal pattern as a result. In fact, the real improvement in living standards has not brought the increase in minimum salary, albeit resulted in some positive trends.
What can the ₴4,100 minimum salary change?
Given the positive trends in unshadowing and increasing tax deductions, the government decided to continue raising the minimum pay. Hence is the Poroshenko’s assumption about the minimum pay of ₴4,100 possible as soon as in 2018 rather than in 2019 as was planned originally.
One could hardly argue with that: Ukraine actually has the resources needed for such an increase in salaries. That becomes obvious if we look at the balance dynamics on the Treasury Single Account – the balance there has not gone below ₴40 bn. over the last three months.
In other words, the country has something to spend.
Unfortunately, there are no guarantees that this experiment will end up well:
— Firstly, increasing the minimum pay to 4,100 will inevitably cause the inflation to grow, which is going to exceed the projected indicators in 2017 (12.2%-13.7% by the year-end 2017 with the projected 9-11%). The inflation, in turn, will drive the further hryvna depreciation. Since the only instruments for combating inflation and devaluation the National Bank has is the discount rate, its increase will make it impossible to lower the interest rates on loans.
— Secondly, the tax burden on business will increase and that means more reasons for businesses to enjoy the benefits of shadow economy. Employers will be more eager to risk with off-the-books employment introducing an hourly pay, redeploying their manpower to work part-time, cutting the staff, and using other saving schemes. In the long run, all this can eventually result in unemployment and a new boost for shadow economy.
— Increasing the minimum salary should be aligned with the gain in production. If there is no gain in production, then companies cannot pay new salaries. They will simply have nothing to pay them with. Which, once again, will result in the business shadowing or its liquidation. The latter largely applies to small-sized enterprises.
— Finally, I would like to note that the IMF does not endorse the minimum pay increase. The previous double increase was criticised there as well while awarding Ukraine with another loan tranche nevertheless. This time, however, it may not be the case given that our government has not met a number of other requirements set by the Fund.
This post is also available in: Russian