Doron Isaacs
The DA noticed something interesting about Thursday’s Budget speech. Minister of Finance Pravin Gordhan “made no clear commitment”, the official opposition protested, “to rollover the Employment Tax Incentive which lapses on January 1, 2017”.
This observation was the very first point in shadow minister David Maynier’s official response. And it was backed by passion: “We will not allow the Budget to be balanced on the backs of young people who do not have jobs.” The party “will continue to fight” for both a “speedy review” and a “rollover of the Employment Tax Incentive”.
In this of all Budget years it seems somewhat extraordinary that a major political party would spend so much airtime in this way. More so because undisputed academic research conducted at UCT has repeatedly shown that since its introduction in January 2014, the ETI has not created any jobs for young people.
If you think I’m reading a lot into the ordering of the DA press statement, consider that fully a quarter of all the party’s tweets on the Budget dealt with this single issue.
To recap: the ETI introduced a tax subsidy, granted by government to businesses, for the first two years of employment of a new employee below 30 years of age. Businesses receive the amount as tax deduction. The hope being that this would induce businesses to hire young people additional to what they otherwise would have. Treasury claimed that 423 000 new jobs would be created, of which 178 000 would be “net” new jobs that would not have been created without the subsidy.
The trouble is that the UCT research has consistently established a “fairly precisely estimated ‘zero effect’ “. According to researchers Arden Finn and Vimal Ranchod, “the ETI has not resulted in a statistically significant change in the probability of young people finding jobs, despite its cost of R2 billion over the first year of its existence”.
There are surely businesses enjoying this season of government largesse during supposedly straitened times. It is, according to Ranchod and Finn, “a pure transfer from taxpayers to a subset of firms who are not doing anything differently”. In other words, they get the subsidy for the youth they already employed, or were going to employ anyway.
Why the DA is so devoted to this unsuccessful policy intervention is harder to say. It certainly campaigned hard for it, even marching on Cosatu headquarters.
Interestingly, DA leader Mmusi Maimane is not unaware of the research and its gloomy findings. He cited an early version of it in January 2015, and went so far as to note that during the ETI’s first year the “total number of unemployed and economically inactive youth actually increased”.
The honest reckoning stopped there though. Instead of humility, an expression of concern that the centre-piece of DA economic campaigning had turned out to be a R2bn-per-year mirage, he placed all the blame elsewhere.
Government had introduced a “watered down version”, Maimane said, a “tax incentive and not a wage subsidy”. But he said nothing to explain the supposed difference between an employment tax incentive and a youth wage subsidy, except that its current form “limits its impact on informal sector firms and smaller firms that are not registered for PAYE”.
There are five problems with the DA’s attempt to get out of jail in this way. Firstly, it has not offered an alternative method for administering the wage subsidy. Secondly, its implicit claim is that adding small, unregistered companies into the scheme would be a total game-changer; an idea very difficult to credit given recent research by Andrew Kerr, Martin Wittenberg and Jairo Arrow showing that, in South Africa, “larger firms are better net creators of jobs than small firms”. Thirdly, having accepted the evidence that a year spent subsidising PAYE-registered businesses had created no jobs, why didn’t the DA call for that to stop? Fourthly, as Maimane’s conceded, the DA had “supported the adoption of the ETI in 2013”, albeit “with reservations”, a key one being – to use Maimaine’s phrase – the “meagre budget of R5bn”. And lastly, as we now know, the party has nevertheless called for the ETI to be rolled over until 2019.
In the end the DA’s case is one of special pleading. It’s the usual claim by the right on behalf of a failed economic project, that the medicine just wasn’t strong enough.
There is nothing in principle wrong with government subsidising business, especially as we teeter on recession’s edge. But government must be honest about what it is doing. If it is subsidising businesses it should say so – it should not claim to be creating jobs for young people. And, as the researchers observe, “these transfers have opportunity costs”. In other words, R2bn per year could be put to use in other ways, ways that may actually create jobs. “It is difficult to believe,” say Ranchod and Finn, “that this is desirable from a policy perspective.”
Now, to be sure, the DA is not primarily responsible for having wasted R2bn per year. That distinction is owed to the ANC treasury that drafted the law, the ANC-controlled Parliament that voted for it, and the ANC president who signed it. But, in 2016, the ANC minister of finance, seems, to his significant credit, to be reflecting critically on the failure of this policy. The DA, on the other hand, either doesn’t believe in evidence-based policy, or are in favour of this business subsidy irrespective of social outcomes.
I fully believe that the DA would prefer the subsidy to be creating jobs, lots of them. But the fact that it isn’t is not a deal-breaker. The party will rightly point to its call for a review – what Maynier called a “speedy review” – and that is to be welcomed. But why do a review at all if you have already decided that the policy must in some form continue? Evidence-based policy means following the evidence where it leads. Here that requires spending R2bn in an altogether different manner.
l Isaacs is the Treasurer of Equal Education