Business Day
*Wage-cap proposal is ideology, not economics* *Mariam Isa, Business Day, Johannesburg, 30 November 2010*NOTHING prompted more snorts of laughter than the proposal to cap executive pay in the New Growth Path unveiled by the Economic Development Ministry last week.
Its suggestions to keep wage hikes in check across the economy make sense, as big pay rises are a harbinger of higher inflation, which hits SA's poor the hardest.
But a proposal that annual salaries be capped at R550000 would do little to curb price rises, and would do more harm than good. The cap is almost exactly at the level at which the top 40% personal income tax rate kicks in this year --- R552000.
The facts speak for themselves. In the 2008-09 financial year, this top tax bracket yielded a staggering 46,4% of the Treasury's recorded personal tax revenue . It is paid by 227000 taxpayers, which works out to about 6% of SA's 4-million taxpayers.
This is quite a disturbing ratio for one of the world's most unequal societies.
But if you cap salaries at the level being proposed, budget revenue in SA will take a body blow. Even capping bonuses at that level will make significant inroads into personal tax revenue , officials say.
Imagine the implications for the funding of social welfare payments to the 14-million poor South Africans who rely on them.
On that level alone, the cap proposal is completely out of touch with reality.
There are other problems.High-income earners --- and we're not talking about the super-rich --- generally have the skills SA needs to grow its economy. If they don't have the incentive to stay, they will leave. What effect will that have on job creation? Are they holding posts that low-income earners can immediately step into?
Another interesting question to raise is which other countries in the world have put caps on pay. Limits on bonuses, especially in the financial sector, have become a hot topic since last year's recession.
Greece and Ireland are introducing wage cuts for public-sector workers, but that is purely in response to the sovereign debt crisis they are fighting.
But even countries that aspire to socialism, such as Sweden, do not cap wages. They simply raise taxes for the wealthy. In SA's case this is a better option, even though it will probably still chase some skilled executives out of the country.
Ironically, it is private companies and their shareholders who would benefit from the proposed wage caps. Providing that there isn't an exodus of key employees, which would hit output, corporate costs should go down and profits increase.
Is that what the Economic Development Ministry wants?A further fact to consider is that capping wages at the higher end of the tax bracket would have little, if any, effect on inflation.
Pay hikes for SA's lowest income earners are more inflationary as there are many more such earners. That is unfair, but does explain why double-digit pay hikes for low-income earners are such a big threat to inflation.
This is what trade unions across most sectors of the economy managed to clinch during last year's recession, to the detriment of employment creation. There is a bit more moderation this year, but most pay settlements are still at least twice the current inflation rate, which was 3,4% last month.
Labour economist Andrew Levy says wage hikes feed into the economy with a lagged effect of about a year. Last year's increases are only just starting to make themselves felt, and will take effect in earnest next year, he says.
So curbing pay increases for low-income earners to levels not too far above inflation --- as the New Growth Path suggests --- makes a great deal of sense.
Predictably enough, this did not go down well with the trade unions.The Congress of South African Trade Unions correctly pointed out that one of the main stumbling blocks to caps on pay in the private sector would be making them legal --- a point the New Growth Path ignores.
If they are voluntary, as some suggest, who would sign up?And would high-income earners in the public sector join the queue for lower wages? Definitely not.
There is a saying that "turkeys don't vote for Christmas". Most people would not be keen to relinquish pay unless there was some benefit to make up for it.
In Sweden, people can see what their taxes are providing --- good transport, medical care, education and so forth.
SA is trying hard, but has not yet reached the level of service delivery at which it is clear that having less disposable income will lead to better living conditions.
So it appears that the New Growth Path's wage-cap proposal for high-income earners is not based on economics but ideology, offered to trade unions in the hope they will then agree to lower pay increases.
That clearly is not going to happen. * Isa is economics editor *From: http://www.businessday.co.za/articles/Content.aspx?id=128195* ** ** -- You are subscribed. This footer can help you. Please POST your comments to [email protected] or reply to this message. You can visit the group WEB SITE at http://groups.google.com/group/yclsa-eom-forum for different delivery options, pages, files and membership. To UNSUBSCRIBE, please email [email protected] . You don't have to put anything in the "Subject:" field. You don't have to put anything in the message part. All you have to do is to send an e-mail to this address (repeat): [email protected] .
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