Minister of Finance Camillo Gonsalves has described as “a generous increase” the salary hike agreed with trade unions last Friday.
“This salary increase stays within the boundary of our Fiscal Responsibility Framework. So it is not an irresponsible increase in salaries, while still being a generous increase in salaries,” he told a press conference on Thursday, two days after three trade unions briefed the media on the agreement.
The government and the public sector unions have agreed to 2.5% increase in 2023, 2% in 2024 and 2.5% in 2025.
Further, the government will increase the personal income tax threshold from EC$20,000 to EC$22,000 annually and will reduce corporate income tax from 30% to 28%.
“We had a very reasonable, rational, focused conversation that produced something that I am very pleased to see that the labour movement considered to be fair in all the circumstances that we are facing. I consider it generous, they consider it fair but nonetheless we have arrived somewhere of mutual agreement,” the finance minister said.
He said the 2.5% in 2023 will translate to EC$9.1 million, in 2024, the 2% increase will amount to EC$7.4 million and the 2.5% in 2025 will cost the government EC$9.4 million for a total of EC$25.9 million.
To increase the standard deduction from EC$20,000 to EC$22,000 will cost the government EC$4.9 million in revenue.
The average insurable wage in SVG “is just a hair above EC$22,000, so the average worker in St. Vincent and the Grenadines is income tax free,” Gonsalves said.
The reduction of the income tax rate will cost the government EC$3.8 million.
“So over the three years, the government will lose EC$51.8 million and that doesn’t include the corporate income tax reduction, which will cost $2.9 million annually,” he said.
He said this would take the total to about EC$60 million in foregone revenue over the three-year period.
Gonsalves said the salary increases alone are EC$25.9 million even as the monthly wage bill EC$27 million.
“So it amounts to, from the government’s perspective, not from the workers’ perspective, an additional month of salary that we are paying over that period. And the $60 million over three years is, obviously, a significant contribution not only to the workers but to economic activity.”
Gonsalves noted that one of the union leaders told their press conference that workers are likely to spend the bulk of the salary increase and tax savings.
“And so, some of that money that we provide to the workers … will find its way back into the economy, which will lead to increased economic activity and which we hope will lead to some improvement in our growth and development prospects,” the finance minister said.
The finance minister pointed out that wage negotiation is not a tax negotiation, adding that a government cannot negotiate taxes with a union because they apply more broadly, including to non-unionised workers and businesses.
He said he did not want people to believe that because the wage increase and tax reduction were being announced together that trade unions are the interlocutor with the government on matters of tax.
Gonsalves noted that the Fiscal Responsibility Framework fixes the percentage of government revenue that can be spent on wages.
Currently, it is set at 14% of GDP and is expected to move to 12% by 2026.
He further noted that the last wage increase was 4.5% agreed over three years, in 2018, adding that back then, no one knew that the COVID-19 pandemic would strike and that the economy would shrink sharply.
Gonsalves said that with the onset of the pandemic, there was some talk in the Ministry of Finance that the 2018 negotiations did not anticipate the impact of the pandemic and that the government should consult the union.
He said that the government, however, decided to honour the commitment it had made two years before the pandemic, and gave the salary increase.
The finance minister further noted that government workers get an increment annually, unless they are at the top of Grade K.
“So this 2.5% is on top of the fact that more than half of the government workers are going to get a 2% increase anyway,” he said.
“We also announce tax reductions and this is very important when considering exactly how much more money people are going to carry home,” he said, noting that not only salaries are increasing but also taxes are going down.
“When those two are added, you end up above 2.5%,” the finance minister said, noting that when he first became finance minister in 2018, he also increase salaries and reduced taxes, moving it from 32% to 30%
Gonsalves said that the longstanding position of the government is that they want to bring income tax rate down into the mid-20s, noting that when the Unity Labour Party government came to office in 2001, income tax was 40%.
He said that he hopes that as things improve the government can revisit the issue again in a few years.
Gonsalves further noted that when the ULP came to office, the taxable income was EC$12,000 annually.
“And that will mean that many, many workers in SVG will not pay income tax because their salary is below EC$1,800 a month,” Gonsalves said, as he spoke of the impact of raising the tax threshold to EC$22,000.
He said that his government “is very proudly a labour government”, adding that the history of the packages that the government has offered has indicated that in good times and bad, the government has been in solidarity with workers.
He said that as minister of finance, he likes to run three-year packages because that is about how far the government predicts realistically and it saves “the drama” of yearly negotiations and can spread the fiscal impact.
The minister said that the current salary increases are “more generous” than in 2018.
“We think that in light of the challenges that we are facing, the tax reduction is fair, it returns to the path of reducing our tax rate to the middle 20s,” he said, noting that prior to 2018, there had been no tax reduction since 2009, when the global financial crisis struck.
He said the increases track with what the various economic forecasters are predicting to be a strong year for economic growth in SVG in 2022.
Gonsalves said that the International Monetary Fund has predicted 5% growth, but the estimates by the Ministry of Finance and the Eastern Caribbean Central Bank are higher.
“But that just takes the economy to where it was before the crisis. It is digging us out of the hole and taking us to the pre-COVID economic levels but next year we are expected to grow well and the following year the economy is also expected to see some growth.”
Gonsalves said that the mandate from the prime minister is that the ministry of finance uses the growth in GDP to take care of the workers, improve public infrastructure, such as roads, and “ to put aside for a rainy day.
We have those three mandates, we have to carve up the pie for economic growth and give some for the workers,” Gonsalves said, adding that the country had to use monies from the Contingency Fund to respond to the volcanic eruption last year and the COVID-19 pandemic.