SA faces initial big outlay to curb growth of wage bill and bail out state utilities

The IMF visited SA recently and concluded that the projections in the February budget were not conservative enough, and the government debt ratio would not stabilise over the medium term as Treasury had forecast.

The fund’s economists therefore want to see the government taking additional steps to cut government debt. They propose that SA set itself a debt ceiling that would mean cutting government debt by up to one percentage point over the next three years — equivalent to a sizable R50bn of spending cuts and/or tax hikes — to “ensure that debt remains at comfortable levels and policy buffers are replenished”.

It’s all good advice in theory. But in practice the Treasury is under massive fiscal pressure and has much more immediate problems on its plate, starting with Friday’s public sector pay settlement, which the government estimates will cost R30bn more than it had budgeted.

In February Treasury budgeted an extra R110bn for the wage bill, but that assumed a pay hike of exactly the consumer price index (CPI) inflation rate. In the event, the increase has come in at CPI plus just more than one percentage point for the first year, declining in the latter two years to a level closer to CPI.

Added to that are two more benefits: an extension of the housing allowance, which now will be available to two public servants who are members of the same household where previously only one could claim it, and improvements to the automatic progression rate for public servants.

All of that means the total wage bill would come in about R7bn over budget in the current, 2018-19 fiscal year, R10bn over budget in 2019 and R13bn in the final year. If the inflation rate ends up higher than the Treasury’s budget assumptions, the overshoot could be even larger.

So where will the money come from? The R30bn is more than the total of R26bn in contingency reserves the February budget set aside for unforeseen expenses over the next three years. If it does nothing, the government could end up breaching its self-imposed expenditure ceiling, denting its credibility in the bond market and with the rating agencies.

However, the government has a plan that would impose substantial costs upfront but change the ever-rising wage trend over the medium term. The plan is to offer voluntary early retirement packages to employees aged 60-65 years. This could see the departure of more than 10,000 workers, and while the associated costs could mean the government would breach the expenditure ceiling in year one, it would justify this to ratings agencies and investors on the basis that the intervention would effect necessary structural change to stop the wage bill consuming more of the budget.

The risk, of course, is that the government could lose valuable experience and skills.

But there’s no question something has to be done: public sector pay is cited by the IMF and others as the big threat to the government’s fiscal consolidation plans.

The other potentially costly threat is state-owned entities (SOEs). And the storyline on the wage bill of “costs now, benefits later” could well be needed there too, if the government has to pay costs associated with their restructuring.

South African Airways has said it needs R21bn to support its turnaround and keep it afloat for a couple of years, and has already drawn R5bn of this, even though the R5bn has yet to go through the required cabinet and parliamentary process.

Then there’s grounded SA Express and cash-strapped Denel, which is trying to get back into the capital markets. And that’s before we even mention Eskom, which wants to go to international bond markets in August, but whose potential calls on the public purse could yet dwarf those of other ailing SOEs. There are other spending pressures too, among them ailing provincial health departments.

While the government will look to shift priorities and spend more efficiently, keeping the lid on the spending side of the budget is going to be a challenge. Nor can the revenue side be relied on to come to the rescue.

The February budget targeted a demanding 10% rise in revenue, which relied on the extra R36bn from tax hikes, largest of which is the R23bn Treasury estimates will be raised from the VAT hike. Whether the tax hikes will deliver those numbers is yet to be seen.

And while the clean-up at the South African Revenue Service will surely help to restore credibility and compliance and boost revenue collections over time, it’s no short-term fix. Economic growth won’t necessarily help either: though it’s early days, the shock first-quarter GDP contraction suggests that Treasury’s 1.5% growth forecast for 2018, and 1.8% in 2019, may be more on track than economists’ much more optimistic Ramaphoria revisions.

Confidence may have been revived but the fiscal issues are as difficult as ever, and the new administration has some tough decisions to make.