Ministry of Finance published explanationatory calculations for the increased minimum wage


Business will be offered a set of measures strengthening the incentive to pay taxes and go out of shadow, which should allow paying the promised UAH 3200 minimum wage.

The Ministry of Finance of Ukraine has published an explanation of calculations for raising the minimum wages. The document  has already been published on the Verkhovna Rada website. This was stated by Yevgeniy Kapinus, Deputy Minister of Finance of Ukraine, at a discussion held at Ukraine Crisis Media Center. “As of today, these figures are incorporated in the state budget. We stated that we do not need to launch a printing machine – all the money will be generated within the planned activities. We hope that this package of measures will provide a proper salary increases for our employees and will not result in negative consequences for individuals or the economy,” noted Mr. Kapinus.

According to the Ministry of Finance, the move will boost purchasing power of the population and stimulate domestic demand for food and other essential commodities. He added that “there may be some challenging issues but they will be settled while implementing decisions”.

Source is the 70 billion remaining in business after lowering the unified social tax
Yevgeniy Kapinus said that the minimum wages could increase to UAH 3,200 due to the money that remained in business after lowering the unified social tax (also known as “single contribution”). “This year the unified social tax has been lowered, therefore, business received additional UAH 70 billion, which they invested in the economy. […] A significant resource remained in business but has not been incorporated into wages. This is the resource that can now be generated and sent to people who are supposed to receive higher wages,” said Mr. Kapinus. In his view, this increase should have been done earlier – simultaneously with lowering the unified social tax to avoid a gap.

The Deputy Minister of Finance reminded that higher minimum wages were meant for spheres of healthcare, education and public enterprises. Overall, 3.5 million public sector employees will get a wage increase. According to him, the move was agreed with employers and trade unions. “The General Prosecutor’s Office, courts, other categories that have high salaries, will receive salaries within the scale provided by the draft budget,” noted Yevgeniy Kapinus. The minimum wage is now separated from payment for administrative services, court fees, and so on.

Risks: shadowing small and medium businesses, layoff, inflation

According to experts, the increase in minimum wages implies several risks. “The biggest problem is whether businesses can quickly find money to increase the minimum wages. […] Businesses have already planned out to spend part of savings on wages and part – on loans and investments. Now it should be revised. These inconsistent steps have a negative impact on the business environment in Ukraine,” said Oleksandra Betliy, project coordinator at the Institute for Economic Research and Political Consulting, expert of the Reanimation Package of Reforms.

A sharp increase in wages can lead to layoff and further shadow income of small and medium businesses, especially in depressive areas, where half the workers officially receive less than 3,200 UAH. “In this case, we have no additional income from the personal income tax (PIT) and unified social tax – the sources that are to finance expenditures for salaries in the public sector,” said the expert.

The second risk is inflation of 0.5-1.5 percent, as businesses can include the wage increase in the cost of production and services.

Recommended protective measures
To reduce the risks, experts of the Reanimation Package of Reforms suggest building a model of shock effects to better visualize possible developments. The second proposal is to raise the minimum wage gradually. “If the minimum wage is increased by 30-40 percent just from January 1 and then it is gradually increased up to UAH 3,200 by the end of the year, it will be a normal option and will allow us to see how business responds,” noted Victor Taran, expert of “Eidos” center.
Potential source of funds should improve tax environment for business
Yevgeniy Kapinus added that the draft laws aimed at improving tax system submitted by the Ministry of Finance for consideration to the Verkhovna Rada will help free up funds for increasing wages. “Business will receive incentives like tax breaks and the opportunity to generate funds for investment through accelerated depreciation and other methods that will stimulate generation of additional revenue and increase in wages by business,” he noted. “If the government facilitates business environment, business should also be socially responsible and pay taxes in full, because these taxes are wages of public sector employees,” emphasized the Deputy Minister of Finance.