The government has found a way to solve several problems in one fell swoop: to de-shadow wages, reduce the pension deficit and increase the average level of wages in the country. From January 2017, the minimum salary will be UAH 3,200. Economists estimate that private sector costs to comply with government demands will be higher than new budget costs, and low-skilled labor may suffer from the initiative.
Wow, everything - to the people
The minimum wage will be more than doubled in two months: from January 1, 2017, it will be 3,200 UAH, an increase of 121% from the current level of 1,450 UAH. This statement was made by Prime Minister Vladimir Groysman during a meeting of the Cabinet of Ministers. “This initiative was previously discussed with the president, representatives of parliamentary coalition factions, and the government. The work of Ukrainian citizens is undervalued. Therefore, it is necessary to create a system in which working citizens will begin to receive proper wages,” the prime minister said. According to the current state budget, from December 1, 2016, the minimum wage will increase by 100 UAH. It was expected that another 50 UAH would be added in January, but now we are talking about an increase of 1,650 UAH.
A sharp increase in the minimum wage, according to the head of state, will help in the fight against poverty. “This decision concerns more than 4 million working Ukrainians, whose wage level is 1,450 UAH. For payments in the public sector, appropriate state budget resources will be found, and in the private sector this is a clear rule that prohibits paying a Ukrainian less than 3,200 UAH per month. A Ukrainian who works,” Petro Poroshenko emphasized.
This clarification is not accidental, because the cost of living for the disabled, to which the minimum pension is tied, will be increased by only 10%. “It’s hard for me to imagine that a decision on the minimum wage of 3,200 UAH will be voted on, but the minimum pension of 1,372 UAH will be left unchanged, as provided for in the draft budget. Such a gap in these social standards has never happened in Ukraine before,” says former Finance Minister Viktor Pynzenyk.
Since there is no money in the budget to raise everyone’s salaries, the abolition of the link between the salaries of officials, deputies and judges and the minimum wage, as well as the “unlinking” of the first category of the unified tariff schedule from the minimum wage, is being initiated. The first category at the beginning of the year will not be 3200 UAH, but 1600 UAH (+20% to the plan of 1335 UAH). This will lead to equalization of wages for unskilled and skilled labor. “The average salary is now 3.6 times the minimum. The minimum wage is tied to the tariff schedule. In this case, we should reach an average salary of almost 12 thousand UAH. The economy cannot provide such a salary,” says Viktor Pinzenyk.
A minimum wage that cuts both ways
Finance Minister Alexander Danylyuk believes that increasing the minimum income of Ukrainians will reduce the number of recipients of subsidies for housing and communal services from the current level of 6 million families. But, according to Deputy Prime Minister Pavel Rozenko, the increased income of Ukrainians will be taken into account when calculating subsidies only in the next heating season 2017/2018.
The government's initiative was assessed ambiguously by experts. “Approximately 40% of the population officially receives a salary of less than UAH 3,200. In reality, most of them simply receive it unofficially. Therefore, raising the minimum wage is a way to force the population to pay wage taxes to the budget,” says economist Maryan Zablotsky.
At the beginning of 2016, the rate of the single social contribution was reduced by almost half - from an average level of 40% to 22%, but employers did not raise everyone’s salaries to the extent of the resulting savings. Receipts to the Pension Fund have fallen by 29% since the beginning of the year. Therefore, the government plans to expand the tax base using a new de facto administrative method. “40-60% of the wage fund, which is approximately 220-250 billion UAH, is in the shadow sector,” says Pavel Rozenko. The legalization of even part of salaries will increase the receipts of the single social contribution (rate 22%) to the Pension Fund and social funds, personal income tax (18%) to the state budget and local budgets, as well as 1.5% of the military tax. An increase in contributions to the Pension Fund will reduce its deficit, which could have amounted to UAH 156 billion in 2017.
There are concerns that increasing the minimum wage will force employers to go even further into the shadows (formally fire employees and start paying them the full amount in an “envelope”; or transfer them to part-time work), or reduce staff not only on paper, but also in reality. “The Hungarian experience shows that the very first reaction is to reduce the unskilled workforce. The government will have to provide additional funding to pay for measures to increase employment,” says Alexandra Betliy, leading researcher at the Institute of Economic Research and Policy Consulting. At risk are small businesses, as well as businesses in areas with the lowest salaries: Ternopil, Chernivtsi, Kirovograd and Kherson.
The Ministry of Finance has not yet published calculations of additional state budget expenses to increase salaries for “public sector employees,” but the authorities were morally ready for this six months ago, when the law “On Civil Service” came into force. The law provides for an increase in the salaries of officials. In the September draft budget, labor costs increased by 16.75%, or UAH 14.62 billion. “Only 20% of those working in public administration and defense receive wages of up to UAH 3,200, that is, half as much as in the private sector. Salaries need to be raised for 100 thousand officials and security forces. Plus about 1 million more teachers, doctors and other state employees,” Maryan Zablotsky calculated.
Victoria Rudenko, Vyacheslav Sadovnichy
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As reported, on Tuesday the Verkhovna Rada of Ukraine adopted in the first reading a bill developed by the government of Volodymyr Groysman. Many have already nicknamed it “the law on increasing the minimum wage to 3,200 hryvnia.” Journalists analyzed the bill and found out what it actually threatens the citizens of Ukraine.
The first thing that attracts attention is that in this draft law there is not a word that the minimum wage from January 1 will be 3,200 hryvnia - this will be established only in the Law of Ukraine “On the State Budget of Ukraine for 2017” " What does this draft law actually provide for? In fact, in it, the Cabinet of Ministers of Ukraine talks in detail about where government bodies, enterprises and institutions will get money to pay their employees a minimum wage that has been increased by more than 2 times.
It is worth clarifying right away: employees who receive wages from the State budget in an amount greater than 3,200 hryvnia can relax - their official salaries will not be tied to the minimum wage, but to 1,600 hryvnia. As a result, the wages of such public sector employees will increase by only 30%. Those whose wages were less than 3,200 hryvnia can indeed expect an increase. It would seem quite good. But the head of government, presenting the new minimum wage, forgot to mention that the wage fund of government agencies will not increase. In other words, government agencies will have to pay a minimum salary of 3,200 hryvnia, redistributing funds from the wage fund - canceling bonuses, additional payments, financial assistance, etc. Thus, this law does not provide for a salary increase, but rather equalization of the income of most employees. Only those who received the least will see their wages increase. It is possible that the only solution for many government agencies will be staff reduction. Do not forget that, of course, subsidies will also decrease - with a minimum wage of 3,200 hryvnia, utility bills, in order to become the basis for a subsidy, will have to exceed 480 hryvnia, which will sharply reduce the number of subsidized households.
No less a “surprise” awaits the students. The Cabinet of Ministers of Ukraine has prepared a really nice gift for them - the number of students eligible for scholarships will be reduced by more than 50% from January 1, 2017. Now, in order to receive a scholarship, it is enough to have high academic success rates and study on a budget-funded form of education. From January 1, everything will change - only those students whose families have a very low income, as well as those who have achieved particularly high academic success, will receive scholarships. The criteria for this “special success” will be established in its resolution by the Cabinet of Ministers of Ukraine, and the management of universities, within the framework of the scholarship fund allocated by the government, will determine the students who will receive the scholarship. In the future, the government plans to further reduce the number of students receiving scholarships - until 2019, their number will not exceed 15% of the total number of state employees. There is nothing to please pensioners either - all pensions will be increased by only 10%, and the maximum pension will remain at 10,740 hryvnia.
As many have already understood, no less “pleasant surprises” await the private sector - entrepreneurs will have to pay more taxes, which means that they will also have to lay off employees or employ them unofficially. Also, the draft Law, adopted in the first reading on Tuesday, provides that entrepreneurs will have to pay a minimum insurance premium regardless of whether they received income in the relevant period. To ensure compliance with these requirements, regulatory authorities will plague private businesses with inspections and fines. For example, denying a regulatory authority access to an enterprise for the purpose of checking compliance with the law will be punishable by a fine of 9,600 hryvnia, and payment of wages without accrual and payment of unified social contributions and taxes will be punishable by 320,000 hryvnia.
The latest “gift” from the Cabinet of Ministers of Ukraine will be total surveillance of citizens’ incomes - in accordance with the draft law, the Ministry of Finance of Ukraine will receive the right of access to all existing registers containing personal data from January 2017. The basis for their receipt will be the need to monitor compliance with budget legislation in terms of citizens receiving pensions, financial assistance, subsidies, social benefits, etc.
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Behind the scenes of the “3200 salary law”
The Rada adopted a bill, which the government presented as “a law to increase the minimum wage to 3,200 UAH.” Nothing is written there about 3200, but there are many other interesting innovations
On December 6, 2016, the Verkhovna Rada of Ukraine, on the initiative of the Cabinet of Ministers, quietly and without discussion (using a simplified procedure) adopted two bills that offset the “sensational” increase in the minimum wage in Ukraine to 3,200.00 hryvnia, announced by Prime Minister Groysman. The essence of the bills boils down to the fact that household incomes will not increase, but expenses will increase significantly.
The term “minimum wage” has been changed in the Labor Code. So, previously it was a rate for simple unskilled labor, which did not include additional payments, allowances and bonuses. Now, this is the amount of remuneration for the monthly work standard performed by the employee. That is, “unskilled labor” and “additional payments, allowances and bonuses” have disappeared from the term. In other words, firstly, a qualified specialist can now be paid the same as a general worker; and secondly, this a qualified specialist can now set a “naked rate” even below the “minimum wage”, since it is necessary that the total payments (salary + additional payments + bonus) should not be less than the established minimum wage.
The system for calculating salaries for public sector employees is completely changing. Now, in addition to the minimum wage, a new term has been introduced - the tariff rate of a first-class worker, which will be set by the Cabinet of Ministers of Ukraine “manually” and which is in no way tied to the minimum wage. The Cabinet of Ministers will also establish “inter-office coefficients”, which will be tied specifically to the tariff rate of a first-class employee, and not to the minimum wage.
Another innovation is the minimum official salary. This salary is not tied to the minimum wage, but to the subsistence level, which, as is known, does not change along with the minimum wage. So, for example, in 2017 the cost of living will be approximately 1700.00 hryvnia, which is significantly less than 3200.00 hryvnia. That is, in fact, salaries will not increase compared to current ones.
The same will happen with the tariff scale for miners, which was established by law on the prestige of the miner profession. Their tariff scale is also “untied” from the minimum wage and “tied” to the subsistence level. Accordingly, miners should not expect wage increases.
It should be noted that only in the Criminal Code and only one provision related to financial sanctions is “decoupled” from the minimum wage - this is the amount of bail. Now it will be calculated based on the cost of living. All other fines and sanctions present in the legislation of Ukraine and tied to the minimum wage will actually “rise in price” by double their current levels.
The government also abandoned its obligation to state-funded students, previously established by the final provisions of the law on higher education - the norm obliging the Cabinet of Ministers to raise the size of the scholarship to the subsistence level was simply excluded from the law.
The maximum pension amount established by Article 85 of the Pension Law has been extended for another year (until the end of 2017) - no one in Ukraine, regardless of merit and pension contributions paid, has the right to a pension of more than 10,740 hryvnia (370 euros per month ) – I just want to pay pension contributions. In addition, one of the components of the formula used for assigning pensions in Ukraine, namely “the average salary in Ukraine,” will now be determined not by the Pension Fund of Ukraine “automatically” based on data on payments in the country, but will be set by the Cabinet of Ministers “manually” " But the indexation of all pensions in the country is “tied” to this indicator, so the consequences are obvious - pensioners, keep your pockets wider.
The Law on Local Self-Government has been supplemented by a provision that local governments can organize inspections of individuals and legal entities in the field of monitoring compliance with labor laws. So, entrepreneurs and businessmen, wait for inspections organized by district and city councils, which (don’t doubt) will include tax officials and all other “suffering” people.
An interesting change affected Article 7 of the Law on Single Social Contribution. Thus, previously, entrepreneurs paid the unified social contribution “for themselves” only in those months when they actually received income. That is, if there is no activity, then you don’t pay the unified social contribution. Now entrepreneurs, regardless of their income and activity, are required to pay monthly EMU “for themselves.”
Also, a mechanism has been introduced for competent services to access data from electronic registers to monitor the income of the population. So, you can sleep peacefully - our wallets have become much more “transparent”.
The salaries of the National Anti-Corruption Bureau and the National Anti-Corruption Agency, the State Bureau of Investigation, employees of the prosecutor’s office, police and judges of all instances were “untied” from the minimum wage, and tied to the “living wage”. My heart sank with pain for them. By the way, the “naked salary” (without bonuses, additional payments and length of service) of a district court judge will now be about 51,000 hryvnia, an appellate court judge – 85,000 hryvnia, a Supreme Court judge – 127,500 hryvnia; The “naked rate” of an ordinary district prosecutor is 20,400 hryvnia, a prosecutor in the regional prosecutor’s office (not to be confused with the regional prosecutor) is 25,000 hryvnia, in the prosecutor general’s office (not the prosecutor general) is 26,500 UAH. As you know, the real salary (with additional payments and bonuses) of these characters is approximately 1.3-1.6 times more than the “naked salary”, so we will sincerely and wholeheartedly rejoice for them - these are the people who live well in Ukraine.
An interesting innovation in the police law. Family members of a police officer, according to the changes, have lost the right to free medical care in medical institutions of the Ministry of Internal Affairs. Family members of the deceased policeman lost the right to free sanatorium vouchers; “switched” to a living wage and payments in the event of the death or disability of a police officer.
And, finally, it should be noted that the calculation standards used when calculating subsidies for utilities (for example, “formula” calculation of the income of a non-working family member) are not “decoupled” from the minimum wage, and therefore the amount of subsidies will be sharply smaller.
So, the essence of Groysman’s “sensational” improvement in life came down not to a sharp increase in income, but to a sharp tightening of belts and the introduction of new checks for businesses and citizens.
The minimum wage in 2018 may be increased to UAH 4,100. This statement was made by the President of Ukraine Petro Poroshenko, speaking at the II All-Ukrainian Forum of United Communities “Life Changing Initiatives”.
Changes to this basic social indicator must be approved by the state budget law. Already on Thursday, December 7, the Verkhovna Rada should consider the draft of the country's main financial document for 2018 in the second reading.
In 2017, the minimum salary is 3,200 UAH per month. From January 1, 2018, it should be raised by 16% – to UAH 3,723. This figure is included in the draft state budget for 2018. If the president's proposal is accepted, the increase will no longer be 16%, but more than 21%. However, the president proposes to raise the minimum wage above the figure included in the budget not from January 1, but at best from the second half of the year. Or even in the fourth quarter of 2018.
“We will be able to analyze the results of six months or three quarters and make a decision to increase the minimum wage to UAH 4.1 thousand,” – said Petro Poroshenko.
According to him, a positive decision will be made if the investment climate and budget revenues improve in Ukraine.
According to the law, proposals to change the minimum wage should be made not by the president, but by the Cabinet of Ministers of Ukraine. However, there seems to be no cause for concern. Shortly after the presentation of the new, increased minimum wage, Petro Poroshenko wrote on his Facebook page: “I thanked the government, which took into account my proposal to raise the minimum wage in the draft state budget for 2018.”
Vice Prime Minister Pavel Rozenko called the president’s initiative “absolutely correct.” He noted that this will make it possible to increase the standard of living in Ukraine in a “non-inflationary way” and increase revenues to the Pension Fund.
The “presidential” minimum salary for an employee will be UAH 3,300
The approval of a new increased minimum wage will increase the income of many Ukrainian families. Salaries will increase not only among state employees. According to the Law “On Labor Remuneration”, the minimum wage is a state social guarantee, mandatory throughout Ukraine for enterprises of all forms of ownership, as well as for private entrepreneurs who use hired labor.
In addition, an increase in the minimum wage entails an increase in other wages. Although not proportional. So, last year, after the minimum wage doubled - from 1600 UAH to 3200 - within six months the average nominal salary in Ukraine showed an increase of 37.1%, and real - by 19.3%.
Along with the increase in salaries, tax deductions from them will also increase. Thus, the minimum salary in 2017 is 3,200 UAH per month. From this amount, 18% is deducted as personal income tax (576 UAH) and 1.5% as military duty (48 UAH). As a result, 2576 UAH remains in hand.
After January 1, if the minimum wage rises to 3723, contributions to the budget will already amount to 670.14 UAH (personal income tax) plus 55.85 UAH (military tax). Total – 726 UAH. The employee will receive UAH 2,997 in person.
After the president’s proposal comes into force and the minimum wage rises to 4,100 UAH, deductions from the minimum wage will amount to almost 780 UAH (738 UAH for personal income tax and 61.5 UAH for military duty). The employee will thus receive 3300 UAH. That is, 724 UAH more than he receives now.
At the same time, let us remind you that inflation is predicted to be 7% for next year. And the dollar can rise to 30 UAH. Therefore, if we calculate the current and future minimum wages in dollars, the increase will be only $15. Now, at an exchange rate of 27 UAH/USD, the minimum wage in Ukraine minus taxes is 95 dollars, and after increasing to 4100 UAH it will be 110 dollars.
For the employer, the “minimum wage” will increase to UAH 5,002
There is a third salary tax, which is paid by the employer. This is a single social contribution (USC), which goes to the Pension Fund. It is 22%. Thus, now the actual expenses of the employer per employee at the minimum wage are 3,904 UAH per month: 3,200 UAH for the salary itself plus 704 UAH for the unified social contribution.
After increasing the minimum wage to UAH 4,100, the employer's actual costs per employee will increase to UAH 5,002. Of which, we remind you, the employee himself will receive only 3,300 UAH.
Many business representatives greeted the news of an even greater increase in the minimum wage with dismay. They believe that the presidential initiative to increase the minimum wage to UAH 5,100 is connected with the upcoming presidential elections. Let us remind you that the elections themselves should take place in the spring of 2019, but the election campaign will start in the second half of 2018.
Predicting the economic consequences of increasing the minimum wage, some representatives of the business environment say that the current tax system is already unbearable for small and medium-sized businesses, and an even larger increase in taxes will worsen the situation. Some entrepreneurs will be forced to close their businesses, others will go into the shadows. In addition, inflation will accelerate, the hryvnia will collapse, and as a result, life will only get worse.
The same forecasts were made a year ago, when the minimum wage was supposed to double – from 1,600 to the current 3,200 UAH per month. The President, speaking about increasing the minimum wage, said that those fears were not justified.
“Remember how much we were criticized, that this would stifle business and drive us into the shadows. On the contrary, it brought me out of the shadows! This decision, which was introduced at the beginning of this year, from 1600 UAH to 3200 UAH, is an unprecedented decision in the conditions of Ukraine. This is the right decision and, in my opinion, it should be continued,” he said.
As reported, the draft state budget for 2018 states that “the growth of consumer inflation slowed from 43.3% in 2015 to 12.4% in 2016.” By the end of 2017, the dollar exchange rate did not even reach the forecast value of 27.5 UAH; now it fluctuates around 27 UAH/USD.
Many entrepreneurs recognize that an increase in the minimum wage increases the purchasing power of the population, and this has a positive effect on business. And they ask to reduce the excessive fiscal burden not by “freezing” household incomes, but by reducing taxes for businesses.
Next year, the minimum wage in Ukraine should rise to 3,200 hryvnia. Prime Minister Vladimir Groysman announced this at a government meeting. However, the draft budget that the government submitted to parliament provided for half that amount.
So far, neither the Minister of Finance nor experts can clearly answer where the funds for this will come from, and how such a step will affect the economy.
Course - for increase
The day before, President Poroshenko, speaking at a meeting of the National Reform Council, said that the reduction of the single social contribution (USC) since the beginning of this year allowed entrepreneurs to significantly raise the salaries of their employees.
“The salary increase should be at least 20-30%,” Poroshenko said.
Following him, Prime Minister Groysman announced the need to increase wages.
He proposes to increase the minimum wage to UAH 3,200 next year. Although in the draft budget for 2017 the government set the minimum wage at UAH 1,600.
“You and I will ensure a twofold increase in the minimum wage in the country. This means one thing - that from January 1, not a single citizen of Ukraine will receive less than 3,200 UAH,” the prime minister said and added that for the first time this amount also corresponds to the minimum consumer basket.
The head of government instructed the Ministry of Finance to take this increase into account in calculating the cost of living in the draft budget for 2017. This, in turn, can affect your pension costs.
However, Groysman did not specify where the government is going to get money for this.
Previously, the prime minister has repeatedly stated that budget spending next year can only be increased when it is known exactly where the money will come from.
Now Vladimir Groysman claims that “this absolutely corresponds to our capabilities and we can provide this from January 1, 2017.”
Finance Minister Alexander Danilyuk also could not give at least some figures.
Danilyuk suggested that, perhaps, due to the increase in wages, the number of requests for utility subsidies will decrease, and therefore budget expenses may also be reduced.
It's clear that nothing is clear
How the government will raise wages and how this will affect the economic situation in the country is still difficult to understand, says Alexander Zholud, senior economist at the International Center for Advanced Studies.
The expert believes that it would be nice if the government, when announcing such initiatives, provided some basic calculations.
“Now we can only talk about some general effects. For example, this will slightly increase the Pension Fund’s own revenues, which are now largely subsidized from the state budget,” says the expert.
Acorn suggests that increasing the minimum wage will not lead to an automatic increase in officials' salaries, as was the case before.
Also, in his opinion, it will be necessary to look for additional money to increase pensions, which are tied to the subsistence level. But to do this, you first need to make appropriate changes to the budget.
It is also unknown how many Ukrainians this increase will affect. Therefore, it is too early to predict how such a government decision will affect inflation, the economist believes.
Acorn actually agrees with the thesis of the Minister of Finance that increasing wages may affect the payment of subsidies, because their purpose depends on the income of those who apply for them.
The wage increase is one of a number of recent high-profile government initiatives.
Last week, the prime minister proposed giving people the opportunity to pay for heating gradually. But so far the main executors of this decision have not explained how it will be implemented.
Next week, according to Groysman, the government will make a decision “that will ensure fair prices for medicines from January 1, 2017.”
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