Govt faces tough choices over civil service wage bill
For more than 10 years, government has delayed reforms to reduce the civil wage bill, a socially and politically sensitive move that could disrupt hundreds of thousands of livelihoods and worsen the troubles in the broader economy. New data by Finance Ministry experts indicates the room for more delays is running out. Staff Writer, MBONGENI MGUNI explains
For technocrats in the Finance Ministry, the broader goal in the short-term is to balance the budget, which would be a return to the fiscal stability necessary to continue the country’s sustainable development aspirations.
That type of stability has been hard to come by, with the last budget surplus recorded as far back as the 2016-2017 financial year. Government had originally anticipated that the first three years of National Development Plan (NDP) 11, covering the years 2017-2018 to 2019-2020, would carry deficits and the last three, covering the period to March 2023 would first balance, then carry surpluses.
For a range of reasons, NDP11 carried budget deficits of P22 billion for the first three years and by 2020, COVID-19 hit, creating the biggest ever deficit hole the country has had to dig out of. For the 2020-2021 financial year, the budget incurred a record shortfall of P14.5 billion, wiping away the government’s reserves.
Finance Ministry documents released this week indicate that for 2021-2022, a P7.2 billion deficit is forecast, which should widen to P8.5 billion in 2022-2023.
Prolonged deficits, such as have been occurring in recent years, drain government’s reserves, force it into more and costlier borrowing, while making measures such as tax increases unavoidable. Ratings agencies, whose assessments determine the interest Botswana will have to pay on any external loans it seeks, have been raising the alarm about the prolonged return to fiscal stability.
According to the technocrats, besides the COVID-19 impact, one of the major reasons balancing the budget has proved elusive in recent years is that recurrent spending has remained stubbornly unmoved by fluctuations in revenues. While the earnings from mining, the Southern African Customs Union (SACU) and other revenue-spinners in the economy have not performed consistently over the years, spending, particularly on the public service wage bill has not only remained robust but has risen considerably in the most recent years.
“Over the years, recurrent spending has remained high as a proportion of total spending, recording an average of 75% for the past five years,” reads the Budget Strategy Paper released recently.
“This is despite government’s commitment to reduce the share of the recurrent budget in total expenditure and achieve a target ratio of 70:30 or 70% recurrent and 30% development expenditure.
“The high recurrent budget is mainly due to rising expenditure commitments associated with the government wage bill and subventions to parastatals and local authorities, and limits the resources available for development spending and for the maintenance of existing infrastructure.”
The Budget Strategy Paper, an annual blueprint developed by the Finance Ministry as part of the budget process, singles out the wage bill as one of the ‘expenditure risks’ to the budget projections made for upcoming financial year.
“It is important to emphasise that a high share of the public wage bill to expenditure compromises budget sustainability, as it implies that the wage bill is overburdening recurrent and total expenditure and that more priority is given to paying wages than other equally (or more) important expenditure needs.
“When there is a high ratio to GDP, it means that a significant proportion of the country’s productive capacity is used (via taxation) to finance public sector wages.
“If the ratio is rising, it leaves limited fiscal space to focus on development expenditure or other forms of essential recurrent expenditure, such as maintenance.
“The central risk is that the size of the public sector wage bill is not reduced, and remains unsustainably large, contributing to overall fiscal instability and consuming resources that could be more productively allocated to other programmes and projects.”
Essentially, the costs of running government are squashing out other important needs such as spending on projects, maintenance of infrastructure and quite critically, tackling COVID-19.
As at the fourth quarter of 2020, 171,966 people were employed in central and local government as well as parastatals, representing about 36% of the total formal labour sector.
While the government has introduced interventions such as limiting the number of vacancies filled and embarking on a limited programme of outsourcing noncore jobs, the size and cost of the civil service has remained high.
The costs of the civil service have risen from about P21 billion in 2017-2018, which was the beginning of NDP11, to about P29 billion in the 2020-2021 fiscal year, partly helped by increases awarded in 2019 and 2020.
In that same period, budget revenues have moved from P58 billion to P51 billion, the latter affected by the COVID-19 downturn. The key development budget went from P14 billion to P10 billion over that same period.
Technocrats are concerned that with COVID-19 still a major and mutating threat, the high wage bill leaves little room for non-salary expenditure, at a time when the government’s other revenue options such as reserves and additional borrowing are constrained.
“With the upsurge in COVID-19 cases and deaths in mid-2021, there is a risk that over the short run, non-personal emolument cost pressures are likely to put additional pressure on recurrent spending, as health spending increases with the procurement of COVID-19 vaccines and their roll-out to the wider population. “These risks increase as the pandemic is prolonged, and as new variants of the disease emerge,” the Budget Strategy Paper reads.
At a fiscal sustainability level, policymakers are worried that with the budget increasingly requiring domestic resource mobilisation such as through higher taxes, the productive sectors of the economy which produce the tax will essentially be supporting civil service salaries and not the projects required for sustainable growth.
In addition, with estimates that all of the P17 billion in budget deficits between this and the next financial year will be funded by either domestic or external borrowings, fiscal authorities are under pressure to ensure every thebe is efficiently or optimally used. External borrowings in particular are made in hard currencies which pose the risk of exchange rate fluctuations that could impact the fiscus if the economy does not recover sufficiently to comfortably cover the repayments.
The Finance Ministry technocrats also note that even if more resources are diverted from the recurrent budget to the development budget, a Catch 22 of sorts develops as higher capital spending lends itself to the growth of the civil service required to manage the projects and ensure service delivery to Batswana.
Budget estimates for the upcoming financial year show that from P29 billion, the Finance Ministry wants to cut the annual costs to about P28 billion. The difference could potentially be the long-expected civil service reforms, dating back to 2010 and beyond.
Former Finance Minister, Thapelo Matsheka, in his February budget speech, had noted the ‘unsustainable level’ of the public service wage bill as a major challenge facing government and promised interventions. Besides abolishing 50% of vacant positions as at April 1, 2021, the Directorate of Public Service Management was due to review the size of the public service and, by March 31, 2021, have made recommendations.
Last week, Matsheka’s successor, Peggy Serame hinted that in the coming financial year, some of the reforms would come via a faster roll-out of the government’s e-services initiatives and other efficiency initiatives. “Efficiency of government spending will be prioritised, especially by speeding up the necessary public sector reforms and improving the roll-out of public e-services,” she said when launching the Budget Strategy Paper.
“This is critical, as we do not have sufficient financial buffers in the Government Investment Account, which declined during 2020.”
For the hundreds of thousands of civil servants and their families, a horrible year of economic contraction and COVID-19 hospitalisations and bereavements could worsen if the planned reforms are announced, as expected, in next February’s budget speech.