Government set to fight against freelancers
The authorities are looking for ways to increase tax revenues, bearing in mind financial risks in the next few years. However, enacted restrictions on freelancers could result in deteriorating living standards and growing dissatisfaction of a large group of people.
On August 8, Prime Minister Myasnikovich called for improving measures against fictitious employment and to find ways to force freelancers to pay taxes and pension contributions.
Government’s initiative is formally explained by the desire to increase the share of tax revenues in GDP. Today 45% of Belarus’ GDP is made of wages, 42% of profit and depreciation of enterprises and 13% comes from net taxes.
On the other hand, according to the authorities, there are about 400 thousand working age people in Belarus that are not registered as workers or students, which makes about 9% of the total employed in the economy. Accordingly, these people do not pay income taxes and pension fund contributions, however, in the Prime Minister’s view, they are active users of free public services, for example, healthcare and education.
The attempt of Myasnikovich to engage this large group of Belarusians in legalizing their activities is rather unexpected, given that the previous government has long turned a blind eye to informal employment, for example, during the 2011 currency crisis. Their argument at that time was that even if a citizen works informally, he or she still contributes to foreign currency inflow to the country.
Government’s initiative could be based on the same concerns, which were recently voiced by President Lukashenko in connection with the need to pay off foreign debts in 2013-2014. Namely, Lukashenko said that if there was no money to pay off debts, he would be prepared to abandon his promise of the average salary at USD 500.
It is likely that after the suspension of Russian naphtha supplies in Belarus for an indefinite period, the government recalculated financial risks in the coming years and decided to play safe and to engage resources of the potential 400,000 taxpayers.
It is difficult to assess the impact from this initiative, as it depends on how active the government will be trying to engage all those non-officially employed in the legitimate economy. There are no doubts that this decision will increase resentment and will lead to other forms of tax evasion and may also cause a sharp increase in officially registered unemployment. Nevertheless, the initiative per se implies there is a shortage of managerial strategies in the government.
The rapid increase in wages has led to a decline in the ratio between labour productivity and real wages to one. Previously, the rule was that enterprises, in which the state owned more than 50% of shares in the founding capital, were not allowed increasing salaries if this ratio was equal to or less than one. The authorities are unlikely to be able to meet the wage growth requirement without long-term consequences for the economy. Hence, the government is likely to contain wage growth for the sake of economic growth.
According to Belstat, In January – August 2017, GDP growth was 1.6%. The economic revival has led to an increase in wages. In August, the average monthly wage was BYN 844.4 or USD 435, i.e. grew by 6.6% since early 2017, adjusted for inflation. This has reduced the ratio between labour productivity and real wages from 1.03 in January 2017 to 1 in the first seven months of 2017. This parameter should not be less than 1, otherwise, the economy starts accumulating imbalances.
The need for faster growth in labour productivity over wage growth was stated in Decree No 744 of July 31st, 2014. The decree enabled wages growth at state organizations and organizations with more than 50% of state-owned shares only if the ratio between growth in labour productivity and wages was higher than 1. Taking into account the state's share in the economy, this rule has had impact on most of the country's key enterprises. In 2013 -2014 wages grew rapidly, which resulted in devaluation in 2014-2015.
Faster wage growth as compared with growth in labour productivity carries a number of risks. Enterprises increase cost of wages, which subsequently leads to a decrease in the competitiveness of products on the domestic and foreign markets. In construction, wholesale, retail trade, and some other industries the growth rate of prime cost in 2017 outpaces the dynamics of revenue growth. This is likely to lead to a decrease in profits and a decrease in investments for further development. Amid wage growth, the population is likely to increase import consumption and reduce currency sales, which would reduce the National Bank's ability to repay foreign and domestic liabilities.
The Belarusian government is facing a dilemma – either to comply with the president’s requirement of a BYN 1000 monthly wage, which could lead to new economic imbalances and could further affect the national currency value, or to suspend the wage growth in order to retain the achieved economic results. That said, the first option bears a greater number of negative consequences for the nomenclature.
Overall, the rapid growth in wages no longer corresponds the pace of economic development. The government is likely to retain the economic growth and retrain further growth in wages. Staff reshuffles are unlikely to follow the failure to meet the wage growth requirement.