1,5 miracles in one box

The government is going to discuss the proposal offer by former prime-minister and incumbent Member of Parliament Hrant Bagratyan to at least double the minimum salary in Armenia.

The prime-minister specifically proposed a recommendation to increase the minimum salary from AMD32,500 to AMD72,500. The former PM explains his proposal with the intention to reduce the difference between the average and minimum salaries from 4 to 1.8 times. Bagratyan says that this will also help to cut down the capacity of shadow economy without incurring additional budget expenses.

The government is not against this recommendation. The incumbent prime-minister’s written answer to the speaker of the parliament writes that increasing the minimum wage is in the spirit of the government’s policy. “The Armenian government’s plan for 2012-2017 envisages increasing the minimum wage at least twice and provision of at least 140 per cent limit of minimum salary/poverty relation. The budget 2013 and its mid-term plan 2013-2015 envisage increase of minimum salary,” writes the document. However, the government does not agree with anything Hrant Bagratyan says.

The ministry of finance does not agree with the opinion that this change will not result in additional budget expenses. Specifically, if the salary of people receiving money up to 72.500 on monthly basis is increased, as a result the entire demand resulted from this change becomes 28.4 billion drams, which means that this is how much the expense line of the budget will increase. The finance ministry does not want this change because they believe it is not fair. “This violates the principle of fair payment of salaries established by the Armenian labor code, does not provide dependence of work capacity and quality from the money paid for it and the results of work in the labor market,” writes the finance ministry also adding that it also ignores the salary of state servants. This means that it is not fair to increase the salary of a state servant by 40%, from 52,000 to 72,000, and leave the salary of those receiving 80,000 the same.

What can be done to make it fair and not to violate the law? The government has envisaged the second plan as well, according to which they may proportionally increase al salaries, the minimum wage including. In that case those who receive 52,000 will receive 72,000, and those who receive 80,000 will receive 112,000. It seems this is fair, but such solution will significantly overload the budget. The finance ministry calculates that in such case the budget expenses will grow by 360 billion drams, which is a very high rate for a small country like this.

This means that two miracles cannot fit in one box – either they cannot be fair in the remuneration definition policy or they have to find 360 billion to cover the budget deficit. Thus, the government is not against increasing the salaries, but they are proposing discussions to find a solution to the issue.

The second contradiction concerns the shady economy. Bagratyan said that the legal changes will result in significant reduction of the shadow in the economy. However, the government believes that increasing the minimum wage will not help to fight the shadow economy. As an explanation they bring an example that in case of such changes employers may refuse to register their staff officially, thus failing to pay the extra tax payments resulted therefrom and the obligation to pay the newly increased higher minimum wage. “Many employers register lower salaries to make less tax payment, and if that rate of salary is increased even more, they will not register many of their employees,” concludes the ministry of finance.

There are other minor observations concerning the legal parts as well, but those are not so important. There is another factor that may influence on the government’s conclusion. It will increase the budget inflows. The higher salaries are, the more social payments and taxes will be sent to the budget. Many companies operating in Armenia are registering the minimum rate for salary to be paid to their directors and other top managers. In case of this new law they will have to register higher limits of salary. The government has discussed this in its statement as well. “As of January 1, 2013, the taxes paid from the income of those receiving salaries less than 72.500 will increase, thus increasing the budget income. This means that this law will have a positive impact on the budget, however it is impossible to calculate the exact amount of that contribution as more comprehensive information will be necessary,” writes the statement of the finance ministry.

The issue will be discussed at the upcoming session of the government. The government agrees with the recommendation, but there are a number of issues to take into consideration, including the rate of the increase in order to meet the possibility of the budget.