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Wage subsidy: R6.3bn and counting

The contentious Employment Tax Incentive (ETI), commonly known as the youth wage subsidy, will easily cost double the original estimate of R5 billion over three years.

National Treasury recently released the first detailed information on the ETI after getting anonymised tax data from the SA Revenue Service (Sars).

Up to now, Treasury only knew how much money in total was being spent and had to guess how many people’s wages were actually being subsidised – or where they worked.

Treasury’s draft report was released on August 26, but has already been updated to reflect an additional R240 million in subsidies.

The ETI cost R6.3 billion between January 1 2014 and February 29 this year.

In the 2015 tax year, which is the 12 months to February last year, it subsidised the wages of 645 973 people at a cost of R2.26 billion.

In its second full year, up to the end of February this year, this, however, surged to R4 billion, owing to a rapid increase in claims.

Even if this level is just maintained, instead of growing further in the third year, the ETI will come to R10 billion, instead of the predicted R5 billion.

Individual tax data are not yet available to establish how many people were subsidised in the second year, but it could easily be 1 million.

In the 2015 tax year, 17% of all the 18- to 29-year-olds in the Sars database were subsidised. This has likely grown to 25%.

The data still don’t allow Treasury to know for certain if the contentious subsidy saved jobs and created new work – or simply got absorbed by companies that would’ve hired the same number of people anyway.

It does shed some light on where the subsidy is going:

  • A total of 57% of subsidised workers had not been on the tax database in the preceding year – an indication that they were not formally employed before and are the kind of inexperienced people the ETI intends to help.

That is, however, not very different from the norm. A total of 55% of unsubsidised young workers also weren’t in the database the previous year, according to the report.

  • The major users of the subsidy were the trade, as well as financial and business services sectors. The latter is the sector into which security guards and contract cleaners fall. The two sectors together received 62% of the ETI in the 2015 tax year.
  • The largest number of claims were for workers earning between R2 000 and R3 000 a month. This is the lowest wage level at which the maximum subsidy of R1 000 can be claimed. The average wage of subsidised workers was R2 980 a month.
  • Labour brokers are important, but not dominant ETI beneficiaries, says the report.

City Press reported previously that major labour brokers had been enthusiastic users of the incentive.

The concern is that labour brokers could claim the ETI on a substantial part of their workforces, which tend to be young and unskilled, without necessarily doing anything differently from before.

The report confirms that 43% of all labour broker workers are eligible for the ETI.

However, according to the Sars data, labour brokers only accounted for 9% of the value of claims and 11% of the number of claims in the 2015 tax year.

That would mean that 12% of the formal labour brokering industry – 74 583 brokered workers – was subsidised by government to the tune of R200 million in the 2015 tax year.

The data also estimate the number of people working for labour brokers at 630 000 last year – less than the 1 million figure the industry has punted in the past.

Responding to questions, Treasury said that this estimate comes from an indicator developed by Statistics SA for policymakers.

“There is likely to be some undercounting on the labour broker indicator we use, as it is not intended to be a comprehensive classification,” said Treasury.

“Broadly speaking, it is difficult to make any conclusive assertions about labour brokers using existing classifications.

“It is accepted that even commonly used definitions are problematic,” said Treasury.

The ETI is premised on the idea that South Africa’s largely union-negotiated wage levels cause youth unemployment.

Unequivocal proof that the ETI was a success would aid calls for breaking down the current wage-bargaining system and keeping the new national minimum wage very low.

Treasury is commissioning independent research alongside its own work to evaluate the outcome against estimates of what would have happened anyway.

These evaluations will be made public and submitted to the National Economic Development and Labour Council.

Parliament will also have to approve an extension, leaving a lot of work to be done if the ETI is to stay in effect after the end of
this year.

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