Up to Tito to trim public sector pay packet
Basing salary increases on nominal growth will be less costly
This week finance minister Tito Mboweni is expected to unveil plans to trim the burgeoning public sector wage bill that accounts for more than a third of the government’s expenditure.
If left unresolved, this is among the factors that could drag SA’s last remaining investment-grade rating into junk.
The National Treasury has attempted to slow the growth of civil servant wage increases, which crowd out other critical expenditure, but it has avoided the retrenchments that could deliver, far more quickly, a savings target of R150bn over the next three years.
The government and public sector unions will begin wage talks in July or August for the next three-year wage agreement from 2021. Citibank SA said this week adjusting compensation growth in line with a nominal GDP growth forecast of at least 5% could save the government about R65bn. Although projections appear to be above inflation now, in the longer term basing salary increases on nominal growth will be less costly.
Real GDP measures the value of goods and services produced in an economy over a particular period. It is adjusted for inflation, and is the more commonly referenced figure for growth. Nominal GDP is the market value of goods and services unadjusted for inflation. Nominal GDP growth, revenue and expenditure measures are likely to be a key focus of Mboweni’s budget.
Old Mutual Wealth’s Dave Mohr, chief investment strategist, and Izak Odendaal, investment strategist, said: “While the real growth rate has been disappointing, hovering between 0% and 1% over the past few years, nominal growth slowed dramatically, from around 8% to 4%. This is lower than at the time of the global financial crisis.”
They said for every percentage point that nominal growth declines, about R50bn in economic activity is erased and with it R12bn in tax revenue.
Gina Schoeman, Citi’s SA chief economist, said if the Treasury’s October forecast of 6%6.5% growth in nominal GDP is applied over the medium term to public sector wage hikes, the saving could be about R8bn.
Cosatu spokesperson Sizwe Pamla said there was no condition binding negotiations to CPI. But any other method the government wants to use will have to first be negotiated. “They will have to table it to the relevant platform and make solid arguments on it.”
The latest agreement was one of the lowest settlements over the past decade. Lower-paid earners got a 7% increase and senior managers received 6%.
In the October 2019 mediumterm budget, Mboweni announced a pay freeze for cabinet ministers, premiers and MECs “for the foreseeable future.” He said pay packages of political office bearers may be adjusted downwards.
The Treasury is under pressure to curb spending, failing which, over the next three years the budget deficit could balloon to 8% of GDP from current expectations of about 6.9% for this financial year, said Schoeman. She said with SA running budget deficits in excess of 6% and nominal growth of about 5%, the country is at the top of a sub-investment grade rating.
“In the end Moody’s will downgrade unless we can move this budget deficit into a 5%-toGDP range. Moody’s will downgrade at some point. The trick is when.”
On Monday, Moody’s announced it had revised SA’s real growth rate down to 0.3% for 2019. It also said: “Real interest rates remain high, constraining real economic activity.”
Schoeman said if the Reserve Bank cut interest rates in March, “does that mean Moody’s will adopt a wait-and-see approach?” Likewise, if the Treasury firmly commits to wage increases in line with CPI, and there is negotiation “involving some harsh measures on head count“, will Moody’s wait to see what the impact will be on state finances or will it cut SA’s rating? Moody’s, which holds SA’s last investment grade rating, is due to release a ratings action at end-March.
But Schoeman said any movement from S&P Global Ratings and Fitch, which both downgraded SA’s rating to junk in 2017, was a greater risk.