Assurance in state spending

CUTS in government spending plans announced in the past two years have been largely successful. They will go a long way towards convincing ratings agencies the country will be able to stick to even stiffer targets set by Finance Minister Pravin Gordhan yesterday.

While the budget deficit – which he had hoped would reach 3.2 percent of GDP in this financial year – has crept up to 3.4 percent, this is due to revenue shortfalls, thanks to slower-than-anticipated growth and not because the government has missed its spending targets.

The difference between revenue and expenditure determines how much the government has to borrow, which affects how much it has to spend on paying off its debt and interest. Because debt-service costs are the fastest-growing item in the budget and limit the funds available to spend on other pressing needs, reducing spending or raising taxes, or both, is the only way to ensure there will be enough money to cover future spending requirements in a sustainable way.

These are among the factors ratings agencies consider in evaluating how able a country will be to repay its debt, in much the way that a bank manager will assess a client’s creditworthiness.

As growth has consistently disappointed over the past few years, Gordhan and his predecessor Nhlanhla Nene have been forced to curb spending plans and increase tax measures. Last year saw a R10 billion reduction, followed by a cut of R15bn for this year, and Gordhan has now added a cut of R10bn to the R10bn already pencilled in for 2017/18 and a further R16bn to the R15bn pencilled in for 2018/19, amounting to R76bn shaved off the Budget between 2015 and 2019.

So far the cuts have been effective, Treasury documents show, with spending remaining stable as a percentage of GDP. This has been achieved mostly by reining in growth in the public service employee headcount, which has been more or less static since 2011/12.

In February, Gordhan imposed a freeze on the filling of vacancies in non-front line service functions, but Treasury documents note that wage increases in health, education and policing have increased by more than two percent a year above inflation.

Remaining within the revised spending ceiling will require further “moderation” in headcount, Treasury documents say, which should be achieved mostly through attrition as public servants who retire or leave are not replaced.

But, with the current threeyear wage agreement expiring in March 2018, there is a risk that more aggressive steps will be needed if the increase is again higher than inflation.

“If government and public-sector workers are able to reach a balanced agreement on wages and productivity, compensation pressures could moderate beginning in April 2018,” the Treasury says.

“This would allow departments to plan for additional staff and make resources available to fund new policy priorities.”