Minimum National Wage & Negative Income Tax: The Good, The Bad and The Ugly

Has anyone thought about the funding of the NIT policy? Further borrowing being ruled out, the only viable option may be a reduction in expenditure on other welfare programs

Award giving organizations like MO Ibrahim, who may be a tad short of awardees, should perhaps take note. During the course of last year, there were two ground-breaking, historical policy measures introduced by the government of Mauritius which will have fundamental implications for the way in which employees are rewarded for their work in future.

1. As early as April 2017, the National Wage Consultative Council (NWCC) had announced that later in the year it would be proposing a Minimum National Wage (MNW) for both private and public sector employees. True to its word, come Dec 2017 the NWCC came forward to proclaim a MNW of Rs 8140 per month to be implemented as from Jan 2018.
2. In Jun 2017 the PM/FM had proclaimed in his budget speech that a Negative Income Tax (NIT) regime would be introduced and implemented as from July 2017. The quantum — to be paid retrospectively from Jul-2017 — was announced almost simultaneously as the MNW in Dec 2017.

Now, the timing of the two announcements — coming on the heels of the each other — may not have been as innocuous as it might seem at first sight. In fact some people may wonder if the “twinning” of the two policies were not pre-arranged so that employers get away with a smaller wages bill, and the poor taxpayer is left to make up for the shortfall. For example had the MNW been fixed at Rs 9k, would the government be still paying the NIT?

Minimum National Wage

A MNW was long overdue in Mauritius; and according to the NWCC the proposed MNW will provide a decent salary for workers in all sectors. No one in their right mind would argue with that, but I am not sure that many would be satisfied with a threshold of Rs 8140. Certainly this is far from adequate for a married man with dependent wife and child.

But a step in the right direction has been taken; and it is to be hoped that it will not be too long before the MNW is enhanced to become a Meaningful Living Wage. For far too long many Mauritius’ industrialists have relied upon all manner of government subsidies — both direct and indirect (think Sugar Restructuration, Hotels, IPP, IRS, ERS, Smart City to name just six) — to make fat profits whilst paying peanuts to their employees. So MNW must be seen as a game-changer; and corporate policy must evolve to ensure a drastic narrowing of the gaps between the poor salaries paid to workers and the extravagant pay-cheques bosses award themselves.

Negative Income Tax

NIT is a progressive income tax system where workers earning below a certain amount do not pay any income tax; instead they receive a financial supplement to their salary from government. The idea of a NIT was first mooted in the 1940s by Lady Rhys-Williams in the UK, and touted again by Milton Friedman in the 1980s in the USA. However it is telling that neither country adopted it as a policy measure, nor has it found favour with any other country in the world so far. A questionable first for Mauritius, then?!

As a matter of fact, the USA did carry out NIT experiments in half a dozen States in the 1960-80s but, because of the negative outcomes particularly on the incentive to work, the project was abandoned. Analyzing the Seattle and Denver findings (popularly known as SIME/DIME), the Stanford Research Institute found “stronger work disincentive effects ranging from an average 9 percent work reduction for husbands to an average 18 percent reduction for wives…that as much as 50 to 60 percent of the transfers paid to two-parent families under NIT might go to replace lost earnings.” They also found that, instead of promoting family stability, NIT seemed to increase family breakup.

In Mauritius’s case it may encourage malingerers — there is no dearth of them — as well as exacerbating the divorce rate which has been steadily increasing during the last 25-years, rising from 1/1000 in 1990 to attain 3.6/1000 in 2014; and latest indications are that it is still on an upward trend. Not the most reassuring of backgrounds on which to base an important government policy! Instead given the negative findings in the USA and since he will be footing the NIT bill, the taxpayer is entitled to ask what litmus test did Government carry out prior to full-scale implementation.

Mauritius & NIT

As announced by the PM/FM in Dec 2017, the NIT ranges between a minimum Rs 100 for those on Rs 9.9k to a maximum Rs 1000 for those earning Rs 5000 per month. It is estimated that 120,000+ of the total labour force of 400,000 are entitled to a payment. The fact that it is payable to such a large proportion of employees is an indictment of the very poor pay conditions prevailing in the country and the entrenched poverty that may be attributed to it.

Furthermore, as Sada Reddi has pointed out (MT 15-Dec-2017), NIT is “another way of subsidizing employers of the private sector out of the public purse.” Whilst no one would expect Business Mauritius (BM) to shout this out from the rooftops, the silence of the vociferous punditry of the mainstream media is surprising — not to say shocking.

In spite of all the goodwill, it is unlikely that Government will be able to increase NIT to a level that would eradicate poverty given its budgetary constraints. In the name of equity therefore it behoves the authorities to ensure that employers pay their workers a decent wage, a Meaningful Living Wage!

Gongs for NITs

It is estimated that the NIT will cost the taxpayer a whacking +Rs 1billion per annum. A piffle if someone else is paying the bill for your dubious policy! But a windfall gains for the employer who should normally be expected to foot the bill for his factors of production.

However since beneficiaries are normally indifferent to the source of funding, Government is likely to reap plenty of political capital from this ill-thought out, hair-brained policy. For instance has anyone thought about the funding of the NIT policy? Government borrowing has long ago broken through the statutory ceiling of 50% (normal convention is to keep it below) to currently stand at 66% of GDP. This should normally preclude the Finance Minister from increasing the budget deficit. The money, therefore, has to be found from elsewhere.

Further borrowing being ruled out, the only viable option may be a reduction in expenditure on other welfare programs. But where will the axe fall? On the Health Services? Education? Old Age Pensioners? Free travel? Whichever it is, it is bound to affect the poorer segment of the population the most. A terrible unmitigated irony because they are the very people whom the NIT is designed to help.

Meanwhile, the architects of NIT will probably find their names figure in the New Year’s Honours list!

* Published in print edition on 12 January 2018