Comment on the proposed renewal of South Africa’s Employment Tax Incentive

When the Employment Tax Incentive was first proposed in draft legislation in 2013, I submitted critical comments – as part of the standard public consultation process. Subsequently, shortly before the legislation was passed by Parliament, I wrote a detailed critique explaining why the policy was a bad idea.

In 2014, I finished a draft, paper-length academic critique of the basis for the policy, but felt that it was necessary to shelve it because by that time I was working for the Parliamentary Budget Office. Indeed, on a number of occasions some MPs suggested that the Office should provide an independent review. Even though that never translated to a formal request, I was glad that I had held-back my paper. However, since I am now back in academia I hope to submit it to a journal soon.

In the interim, the policy is up for renewal because under current legislation it will expire at the end of 2016. These are the (very brief) comments I submitted, in response to the usual public invitation, arguing that the policy should not be renewed.

While the objectives of the policy may be laudable, not least in the current environment of unrest at our universities, I do not think this is the right mechanism to use and suspect the surplus is largely accruing to firms rather than young work-seekers.

COMMENTS ON THE EXTENSION OF THE EMPLOYMENT TAX INCENTIVE AS PART OF THE 2016 DRAFT TAXATION LAWS AMENDMENT BILL (SECOND BATCH)

In 2014 I submitted comments on the Draft Employment Tax Incentive Bill. (That file is attached for reference purposes along with a Mail and Guardian article on the same topic). The two most notable points were that:

1. The evidential basis for proceeding with the policy was weak
2. There was good reason to believe that government would commit significant funds to subsidising firms for jobs that would have been created anyway.

The policy was subsequently implemented, despite these concerns not being addressed.

Despite the desire to now extend the Employment Tax Incentive (ETI) that was implemented, neither the National Treasury nor SARS have provided any evidence that the ETI has created new jobs for the target group.

The Employment Tax Incentive Descriptive Report (August, 2016) provides some useful information on uptake rates, but this on its own is of little value in deciding whether to extend the policy or not. The critical admission in that Report is that, “It is not possible to use descriptive data to determine whether these supported jobs are new jobs created, jobs that have been saved from being lost or jobs that would have been created anyway”. In other words: the Report is unable to provide any guidance on whether the policy is actually achieving its objective, or whether it is squandering public revenue on a misguided scheme.

The only systematic analysis in the public domain (Ranchod and Finn, 2016) found that in the first 6 months after the policy being implemented there was no discernible impact on youth employment. That study has many limitations but the Treasury and SARS have not provided anything better. If these institutions do not have the internal capacity to produce a credible impact analysis, it would have been appropriate to consult external experts to assist.

It appears irresponsible to extend the ETI on the basis of such wholly inadequate evidence. In the current fiscal environment these funds could certainly be put to good use elsewhere. Furthermore, the Treasury should consider the medium-term consequences of renewing its own policies on the basis of such weak/non-existent evidence. Besides compromising its own credibility, this may set a precedent for other departments in future.

Dr Seán M Muller

Senior Lecturer

Department of Economics and Econometrics

University of Johannesburg