2023 – A tough year for small businessPosted on: January 16, 2023
Inflation, Minimum Wage, and the Employers Health Tax – challenges for business
Its shaping up to be a rough year for business survival in BC.
A few years ago, when the BC NDP passed legislation on the level of minimum wage in BC, it was welcomed as a positive move toward a living wage and creating greater affordability. In general terms, I agree. A base livable wage is important to affordability, disposable income, and purchasing power in addition to assisting your workforce to become more stable.
However, there is a facet to the minimum wage legislation that may become challenging to smaller employers who are already struggling to make ends meet, emerge from the pandemic, and plan for an impending economic downturn (possibly recession). That challenge is: the minimum wage rate in BC is now tied to prior year average inflation. So, each year on June 1st the minimum wage will rise equivalent to the inflation rate of the prior year (in 2022 it is anticipated to be close to seven percent).
I cannot see a situation where the rate will ever decrease in a year, meaning there will be continued upward pressure in payroll costs in support a broader set of provincial and national economic goals.
On top of the wage issues, the increase in minimum wage may also result in an employer now being liable for covering the Health Employers Tax.
As an example, an employer with thirteen employees, paying twenty dollars per hour, will see a wage will bump across the board resulting in cost of payroll increases from $473,200 to $506,324. This then triggers the health tax of 2.95 percent (payroll over 500,000 must pay the HET). In this scenario, the base payroll increases by $48,060.56 due to inflation/minimum wage, and the Health Tax increases the cost by an additional $27,300 dollars more. The total cost, just for the payroll portion of increased costs for this employer is $84,460.56.
On top of this potential issue, Inflation is a killer of all things positive in a business growth economy.
In the last 24 months we have seen:
Vehicle fuel price spikes of almost forty percent to finally settle at an annual rate of twenty nine percent. This influences many service costs for businesses adding fuel surcharges and increasing shipping costs across the board.
Food prices that are up over ten percent for grocery items and eighteen percent for grains. This has a direct influence on food costs for restaurateurs, bakers, manufacturers and processors, driving per meal or portion rates higher, possibly resulting in lower restaurants visits or item purchases, and we are already seeing both changing grocery purchasing behaviours at the grocery store and an increase in grocery store shoplifting.
Utilities are up across the board, with piped gas up almost twenty percent, and electricity up one percent.
In addition to these costs, Business is currently seeing rising business insurance rates, lease costs, and civic utilities in addition to a rise in property tax based on elevated valuations over the past few years.
Then there are the five mandatory sick days that were added last year in BC, (ten days for Federal employees) and the proposed fifteen days called for by the BC federation of Labour. The current system with five days costs approximately $749.00 per employee if wages are at $21.40 per hour (using the same employer scenario from earlier with a $20.00 wage now costing 21.40). If we increase this to 15 days the cost is closer to $2250.00 per employee, times 13 employees or an added cost of 29,250.00 per year.
Then there are interest rate increases that have zoomed from a meager 2%-ish interest rate to somewhere around 7.5 percent, with predictions to go higher. This means that the cost of financing purchases or operations have raised significantly over the last quarter and are expected to rise even further in the coming quarter. Also, it is good to recall that borrowing a dollar actually costs a business 2.25 dollars approximately in repayment. This is because n order to repay that dollar you must earn a dollar to repay, a dollar to cover the dollar lost to repayment, and then pay interest if you go over 21 days carrying the debt.
on top of all that, I recently, I wrote about the Wage/ Inflation Spiral. Here is what I had to say:
“Some economists have been warning about a series of systemic threats to the health of our economic system. One is the price/wage spiral. This is a process in which “wage increases cause price increases, which in turn cause wage increases…”
This is a potentially devastating process. Once started, it has the very real potential to disrupt the entire economy by causing wages to rise to an unsustainable level, in response to inflationary pressures related to pricing. Historically, price-wage spirals are limited to single economies, however on the tail of the endemic we are seeing indications of this cycle emerging in multiple globally focused economies.
Add to the predicatively negative nature of this cycle the unforeseen pressures in our current economic system, such as manufacturing challenges, reduced labour forces (result of retirements, Inflation, lack of immigration, and reduced numbers of temporary foreign workers), supply chain challenges, shipping issues, and a host of other influences, and its clear that we may have already tipped the scale toward significant impact.
The challenge for business is that even once inflation had been brought under control (by interest rate hikes in the current scenario) the prices for these purchases seldom drop. What does change is that the escalation in prices for goods and services drops to a more manageable level, which is historically focused in the two percent range.
Many of the costs I have discussed are not discretionary. The only way for the business to continue to remain viable is for these costs to be passed along to the consumer. Therefore; without serious consideration of economic interventions such as tax rate reviews, inflationary cost measures reviews (lending rates), greater efficiencies in our supply chains (possibly even more domestic production) we could be facing a sustained economic downturn.