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Ukraine raises mandatory minimum wage: No occasion for joy

Author : Natalia Lebed

Source : 112 Ukraine

August 25, the Verkhovna Rada have raised the minimum wage to 180 USD
16:33, 26 August 2020

Open source

On the eve of the elections, the life of the Ukrainians becomes better, as the officials' race to make their voters satisfied. During this period, you can get everything – from regular hot water supply to an increase in minimum wages. But the issue of the salaries is not that simple as with the hot water supply.

August 25, the Verkhovna Rada of Ukraine voted for raising the minimum wage to UAH 5,000 (180 USD). The idea was supported by President Zelensky. However, would society benefit from it?

Related: Minimum wage raise in Ukraine: Consequences for economy and living standards

  1. The government is betting heavily on the shadowing of official payments in the field of non-state enterprises, which is a rather ephemeral hope. We cannot say for sure that de-shadowing would work. The previous government, in particular Vice Prime Minister of Ukraine Pavlo Rosenko, boasted that they reduced the size of the single social contribution from 38% to 22%. But the problem is that the contribution itself remained undifferentiated.

What does this mean in practice? In any case, it is more profitable for the employer to pay a contribution from 170 USD of salary (the current minimum wage) than from 180 USD. Moreover, 180 USD is not the limit. In 2021, the government would like to raise the "minimum wage" to 240 USD. But no new incentives would appear. Thus, one of the ways out for small and medium-sized businesses, which does not want to either cut staff or curtail production, might be, on the contrary, in an even deeper "shadowing" and even larger volumes of "black cash".

  1. The increase in minimum wages would not only affect business. The public sector will also have to find additional funds in order to pay the difference between 170 and 180 USD (and in the near future - between 170 and 240 USD). Let me remind you that at the end of July, the budget shortfalls grew to 10,9 billion USD, and this is a record for the last five years. So, it will not be possible to make a decisive foray into the state treasury, it is simply empty. Then where will the funds come from?

Related: President calls on MPs to support increase of minimum wage in Ukraine

According to some reports, the authorities want to plug the budgetary deficit with more active "transfer" of funds from local budgets to the central treasury. In this case, the Ministry of Finance is allegedly preparing changes to the Budget Code. On this occasion, only one thing can be said: goodbye to the promised decentralization and financial independence of the regions.  Let's remind that now the basis of any local budget is the deduction of personal income tax.

The local budgets are already receiving fewer funds. For example, mayor of Ivano-Frankivsk Ruslan Martsynkiv recently complained that his city was missing 1,8 million USD - the "center" did not send these funds back.

  1. Another almost utopian way of filling the treasury is to increase citizens’ consumption. The more a person earns, the more he consumes and the more taxes from the goods and services sold are transferred to the country's budget. But all this happens on the condition that goods and services maintain the established price, and the population does not have an additional financial burden to pay for more and more expensive gas, electricity, and other nominations from the housing sector.

Meanwhile, Ukrainians’ consumption is at a quite low level. According to demographers and sociologists, every fifth Ukrainian is undernourished today. Every third person lacks funds to buy clothes and shoes. Every second person only dreams of purchasing a smartphone or other household appliances. Therefore, it would seem that an increase in the minimum wage would at least slightly facilitate the existence of the average Ukrainian. But there is one factor, which we would talk about later.

Related: Ukraine's govt develops three stages of raising minimum wage, - PM

  1. Raising the minimum wage increases inflationary pressures. Why? Let's analyze this question. As you know, inflation is an increase in the general level of prices for goods and services. Such an increase might not even be economically justified, but will manifest itself as a consequence of panic and "reinsurance". Every second employer would want to include in the price of their goods or services additional costs of wages for employees. The consumer will pay for such expenses.

Therefore, the prices for goods and services will still rise. Therefore, the allegedly "improved" purchasing power of Ukrainians will be a big question mark. We should not forget about intolerable inflation too.

  1. The next point is related to unemployment. It is likely that it would also increase. If some of the small and medium-sized businesses go bankrupt, the unemployment rate would increase. Payers of the single tax are under a special blow. 42% of taxes go to the budget from the salary of each of them: 20% of the single tax and 22% of the single social contribution.

After listening to all these counterarguments, those who disagree with them might ask: so, is it worth raising the minimum wage at all?

The current government, like the current government, lacks strategic, integrated thinking. By raising the minimum wage, one must simultaneously take care of reducing the tax pressure on the business. The employer must pay the ERU budget in the amount of 22% of the official salary. In addition, those who receive official pay, miss 18% of their salary in the form of personal income tax. Another 1.5% goes to military collection.

We away pay taxes with every purchase, paying 20% ​​value-added tax. And if we are talking about excisable goods (tobacco, alcohol, fuel), then we pay additional fees for them. The notorious Ukrainian taxes are the factor that constantly sets us back, scaring away potential investors. For comparison: in the structure of the US GDP, all taxes taken together make up 24%, in China - 20%, in India and other developing countries - below 20%, in Ukraine the "tax contribution" to GDP is close to 40%.

Related: YouControl: Wage arrears to Ukrainian doctors rose by 54% during lockdown

At the same time, we have a huge army of officials, that is, those persons who do not produce a product that is subject to taxation. It is estimated that there is one official in Ukraine for every 170 citizens, which is an astonishing figure, especially when compared with the fact that one doctor (according to the calculations of the Ministry of Health) accounts for 2000 patients.

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