State wage bill is unaffordable
If we are realistic, given past trends, the government was not likely to secure a wage settlement with public servants of anything less than consumer price index (CPI) plus 1% without a major confrontation such as a strike.
The unions have won increases that were well above inflation for at least the past decade. Taken together with other occupational dispensations that were granted, the average employee salary has risen 29% since 2008. By 2017, spending on compensation consumed 35% of the budget.
So the three-year deal reached on Friday, which is expected to be signed by the majority of unions, secured increases of 6% and 7% for employees in the first year, followed by CPI plus 1% for the lowest earners, CPI plus 0.5% for the middle earners and CPI for the top earners in the outer two years. It was the least costly that has been negotiated for a long time.
It was still too much. To keep expenditure ceilings intact and not overshoot compensation budgets, the Treasury needed a straight CPI settlement across the board.
In the February budget, the government pencilled in a 7.3% wage increase for the next three years. The rule of thumb of the last decade has been that in addition to the cost-of-living increase, public-sector wages rise by another 2% a year. This is because there are other costs built into the package, such as a phenomenon called pay progression, which entitles employees to an increase for each year of seniority.
In the settlement reached last week, additional pay progression benefits were provided to teachers and police to bring them in line with other employees. Also, a provision that allows only one spouse in a household to receive a housing allowance will be phased out. These improvements, plus a cost-of-living settlement that is in most cases above CPI, mean that the settlement busts the budget.
A comprehensive review performed by the Treasury in 2017 showed that employees in the public sector generally earn more than their private-sector counterparts. In every category of the labour force up until the 90th percentile, public-sector workers earn more than those in the private sector. It is only at the very top end that the private sector earns more.
Whatever your view is on whether public servants deserve such a premium, the problem is that it is unaffordable. If SA is to boost economic growth the budget must be rebalanced away from consumption and into investment.
To deal with this imbalance and to get spending pressure under control, the Treasury has put expenditure ceilings in place and has left it to departments to manage their own budgets. The consequence has been that salaries have been eating into budgets for goods and services for the past three years. This has caused some departments to put the brakes on hiring even where the vacancies are funded in the budget.
But to shrink employment by stealth and through pressure can only achieve so much. While the headcount has begun to decline, frontline services in hospitals and in schools are being affected. Much tougher and more targeted measures will need to be put in place.
In the short term, these will cost money. Pension shortfalls will have to be funded by the government if employees are to be persuaded to take early retirement. Voluntary severance packages are also expensive. These strategies are not without risk as we know that it is the better-quality employees who choose to leave voluntarily, while those that stay behind are the people with fewer options. The government’s last voluntary retrenchment exercise in the late 1990s, for instance, resulted in the loss of experienced teachers.
Cutting jobs in any sector is not a decision that can be taken lightly, given SA’s unemployment crisis. But if the upward trend in wages cannot be arrested through negotiation, it does look as if a reckoning with public servants has finally arrived.
A COST-OF-LIVING SETTLEMENT ABOVE CPI MEANS THAT THE SETTLEMENT BUSTS THE BUDGET