Trade Union Budget Proposals and their Economic Growth and Inclusion Prospects

Earlier this year Finance Minister, Pravin Gordhan, presented the 2014 Budget Speech in parliament. The purpose of the budget speech is to outline the year’s fiscal policy; how the government plans to obtain its funds and how it plans to spend them. More importantly, however, is how the 2014 fiscal policy will affect economic growth and inclusion in South Africa. While Gordhan has, in the context of his speech, made it clear how the policies are intended to work towards growth various trade unions have disagreed and offered their proposals in response.

This essay will aim to compare and analyse the plans of government (as per the budget speech) in conjunction with the proposals put forward by trade unions. An evaluation will be done in terms of the affordability and possible outcomes of each proposal. Both the budget speech and the responses by trade unions provided substantial plans and counter-suggestions, this paper will focus on just three; the issue of government planning to offer tax relief to lower income earners while trade unions propose an introduction of various taxes, and the highly contested issue of a youth wage subsidy. Each topic will also make reference to possible bias that trade unions may have and why they may argue strongly for some policies and against others. Given the political nature of trade unions and fiscal policy, coupled with 2014 being an election year, various political issues are unavoidable and will too be discussed.

Defining economic inclusion and economic growth will be central to this discussion. Economic inclusion is present, as per the European Bank for Reconstruction and Development (n.d), when “broad access to economic opportunities” exists. This implies that all citizens of South Africa regardless of class, gender and educational level are able to access job opportunities and other economic activities. Economic growth is simply a real increase of a nation’s income over a period of time (Blanchard, 2011). In this paper economic growth will commonly be expressed as a growth in GDP, aggregate output or consumption.

The budget speech and trade unions in Context

On the political front, critics of the 2014 budget speech argued it was “muted” and, given that 2014 is an election year, was simply being used as a vehicle of voter appeasement (!!!). These allegations are interesting as they offer perspective on the framing of the budget speech and the choice of policies presented. Fiscal policy is traditionally used to combat financial problems but it is worth considering that this year the budget speech placed importance on making consumers and businesses happy as a tool to garner votes.


According to the Quarterly Labour Force Survey (2013), trade unions represent only 24.56% of the labour force which translates roughly into 3 million members of a 15 million strong labour force. This relatively low ratio of union participation will become important when considering trade unions’ proposals and whom the proposals stand to benefit. Furthermore trade unions tend to represent a certain demographic, the details of which will be discussed when relevant. South Africa is home to many trade unions who represent a number of industries, most of which are affiliated with the Congress of South African Trade Unions (COSATU). For the purposes of this essay COSATU, as the umbrella body, will be dealt with as a representative of all its affiliated trade unions.

Tax relief vs. tax introduction

Gordhan presented plans to offer relief of 9 billion Rands worth of personal income tax to South Africans which is indicative of fiscal stimulus; decreasing taxes in the hopes of achieving higher consumption and growth. In contrast, COSATU has called for a number of tax introductions; a tax on the super-rich, land-tax and higher export taxes to name a few (Craven, 2014). The economic implications of reducing and increasing taxes will be examined and evaluated.

According to the Aggregate Supply – Aggregate Demand model output is a positive function of consumption. The goods market, like the AS-AD model, supports the notion that increasing consumption (C) would increase output and, effectively, GDP (Blanchard, 2014).

Y = C(Y-T) + I(Y,i) + G

Because consumers’ disposable income is subject to tax (T), tax relief would allow consumers a higher disposable income (Y) which they could either spend or save. Assuming that consumers choose to spend at least a portion of their increase in disposable income, the economy will see an increase in activity and growth. Figure 1 below is a simple representation of how increasing consumption increases output and GDP.

Figure 1. Graphs showing the relationship between an increase in consumption in the goods market and an increase in aggregate output

There is little room for doubt that tax cuts in South Africa are an important tool in stimulating economic activity and growth, even on the consumer level. Angela Merkel, who currently holds office as Chancellor for Germany, is a notable proponent of using tax cuts to boost growth (Steen & Peel, 2011).

COSATU has proposed a number of taxes to be introduced and claims that they are necessary for the tax system to be “progressive” and to allow for decent financial resources that the government can utilise (Craven, 2014). All of COSATU’s tax proposals have been linked to improving the equality and inclusivity of the economy, not improving growth. More importantly, all of its tax proposals are targeted at demographic groups that remain largely outside of its membership. 46% of COSATU members earn below R5000 a month making it very unlikely that COSATU members will be on the receiving end of taxes that target the super-rich, luxury goods, land, and the various off-shore investment restrictions (COSATU, 2012a). COSATU is not at risk of losing popularity among its members by recommending the above mentioned taxes.

The issue of tax introduction and tax relief in terms of the economy can be whittled down to a debate on economic inclusivity versus economic growth. The government is looking for ways to increase the economic activity and GDP of South Africa as a fiscal policy tool while COSATU is fulfilling its duty to its members by promoting economic inclusivity. Neither Gordhan nor COSATU are incorrect in their motives and both issues are pertinent to the economic landscape of South Africa. If reaching a middle ground is to be considered, COSATUs suggestion to introduce a tax on the super-rich is closest to the optimum. Ostry (2014) has written extensively on the benefits of such taxes stating that even small percentage taxes on the super-rich can result in substantial returns that aid in redistribution and infrastructure improvements. Ostry’s findings regarding the taxes were supported by a report published by the IMF (2014) on super-rich taxation earlier this year.

The youth wage subsidy

On the topic of the youth wage subsidy, formally known as the Employment Tax Incentive (ETI), the budget speech only touched on the idea by stating that a youth employment incentive was introduced in February. The South African Revenue Services (SARS) website sheds light on the implications of the youth employment tax incentive; for each employee between the ages of 18 and 29 that a registered Pay As You Earn (PAYE) employer hires, there is a deduction in the overall PAYE tax owed by the employer (SARS, 2013). The intention of the youth wage subsidy was to curb high rates of youth unemployment, the last of which were measured at 49% and 28% unemployment in the 15-24 and 25-34 age groups, respectively (QLFS, 2013).

On the implementation of youth employment tax incentives both COSATU and its affiliates have disagreed. It is valuable to note, however, the average age of members affiliated to COSATU trade unions is above 37 (COSATU, 2012a). Figure 2 shows an infographic which makes clear the fact that all trade unions affiliated to COSATU have an average member age that is well above the age bracket to which the tax incentive would apply. A clear bias may occur; COSATU has little reason to propose (and many reasons to oppose) the introduction of the ETI.

Figure 2. Infographic outlining the average age of union members

Politics aside, the introduction of a youth wage subsidy has tangible economic outcomes. As argued by the National Treasury (2011), introducing the ETI means that the possible financial risks associated with hiring labour (in this case, the youth) about whose productivity and efficacy is unknown are alleviated. Additionally, the knowledge of the subsidy might, the Treasury argues, encourage youth to look for work when they may have otherwise have felt discouraged. Their final point for proposing the subsidy is that it allows for employers to cut costs and rather spend on training programmes for the newly-hired youth. This, however, is invalid. There is no guarantee that employers will spend the money saved by the ETI on training or educating their young workers and no enforcement planned to that effect. Game theory and fallacies aside, decreasing the real cost of labour will have an impact on the unemployment rate.

Figure 3. Graph showing an increase in the demand for labour and a corresponding increasing in employment

Figure 3 is a graphical representation of the Treasury’s argument. They are of the belief that, to begin with, Labour supply in South Africa is relatively inelastic due to high unemployment rates and show this by the making the slope of the function fairly gentle. With this in mind, they propose that an initial decrease in the real wage rate (by way of the ETI) will make input costs comparatively lower and cause a rightward shift in the demand for labour. As depicted, these dynamics will increase the rate of employment, output and ultimately, economic growth. This was the crux of their argument and is likely why the tax was eventually introduced.

COSATU’s response to this was two-fold. Firstly, there was a disagreement on the theoretical notion that the subsidy would decrease the marginal product of labour. COSATU (2012b) argued it would only “decrease the wage paid by the firm”( COSATU 2012b). This is illogical because there is a direct relationship between a decrease in costs of labour (or, as COSATU phrased is, a “decrease in the wage”) and an increase in the marginal productivity of labour. Secondly, and more importantly, they were adamant that the substitution effects of such a policy would ultimately off-set any benefits enjoyed by it. By this COSATU meant that employers would chose to terminate the employment of older, more expensive workers in favour of their younger, more economical counterparts.

The National Treasury has a responsibility to combat increasing levels of youth unemployment and has come up with a viable solution to do so. Incentivising employers to forego their intuitive preference for more experienced, often older, labour by decreasing the real financial risk is an effective way to deal with youth unemployment. COSATU, as discussed, has an understandable agenda to protect their members who are, on average, older than the beneficiaries of the ETI. They are rightfully concerned about the possible substitution effects of the subsidy and the South African government would do well to follow the lead of developed countries who have introduced safeguards against such issues. One example of this is the Danish government forcing employers to ensure that when they take on subsidised workers the increase in their employees is a net increase (Democratic Alliance, 2010).

Concluding remarks

Pravin Gordhan’s budget speech provided a roadmap to economic growth in South Africa while COSATU placed substantive emphasis on growth being inclusive and representative. Taxes, it was discussed, should be cut to achieve economic growth and introduced to gather funds for redistribution efforts. A possible solution that would ensure inclusivity without jeopardising economic growth was the introduction of a tax on the super-rich. The youth wage subsidy is a highly contested debate that is framed in the worsening issue of youth unemployment coupled with the possibility of employers being incentivised to substitute older workers for younger, cheaper ones. It would appear COSATU, in this respect, is more concerned with appeasing its members than improving problematic unemployment rates. A possible solution to this was forcing employers to honour their employee contracts and ensure any new hires resulted in a net increase in employees.

In the context of the issues discussed herein it would appear the government was concerned with growth while COSATU was concerned with inclusivity. The South African economy requires both and whether a workable solution that achieves each of these outcomes exists is yet to be seen.

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Reference List

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