AT THE TROUGH

The biggest wild card affecting SA’S fiscal sustainability — apart from what happens at Eskom — is whether government will succeed in negotiating an affordable public-sector wage deal in 2018.

The medium-term budget allows for the wage bill to rise by 7.2%/year on average over the next three years and to stabilise as a share of government expenditure. Anything more generous will put extreme pressure on the country’s finances.

As a warning shot, finance minister

Malusi Gigaba has provided detailed figures on public-sector employment trends over the past decade, revealing how the publicsector wage bill has overwhelmed other aspects of spending, and how the upward drift in the distribution of employees has, over time, significantly raised the average level of real remuneration. Public servants are now better paid than the median taxpayer at every point of income distribution, bar those in the 95th percentile (see graph). Michael Sachs, who heads the budget office, says the information is being disclosed ahead of the wage talks to inform the debate. But as the two parties gear up for the crucial talks, there is no sign that workers are aware that SA is in a fiscal crisis.

The unions want a general salary increase of 10%12%, against treasury’s projection that CPI will average 5.4% over the next three years. Treasury is desperate to avoid a repeat of the three-year deal struck in 2015. It cost R64bn more than what was budgeted for and wiped out most of SA’S three-year contingency reserve. It proved what South Africans had always suspected — treasury is powerless to enforce wage restraint on the rest of government.

Treasury had argued against granting the increase but it had to abide by the overriding cabinet decision. Labour, on the other hand, stood firm on its demands and in the end government backed down for fear of causing strikes and protests.

“It’s supposed to be a process of give and take but the way it happens, the state gives and unions take,” Sachs told the Financial Mail at the time. “There is no reciprocity in terms of linking pay rises to performance.”

Treasury data shows the number of civil servants exploded from 1.13m in 2006/2007 to peak at 1.33m in 2012/2013. This has since declined to 1.3m but remuneration per employee has continued to rise steadily.

Since 2008/2009, the wage bill has grown by 37% in real terms — or about 4%/year after inflation. Only about a quarter of this increase is as a result of expanded employment: the rest is a result of awarding higher wages to existing workers.

In nominal terms, the wage bill has grown faster than nominal GDP growth as well as all other areas of expenditure, bar interest payments. This has meant that growth in spending on capital, goods and services and transfer payments has had to be much slower. In other words, the wage bill is increasingly crowding out spending on other things, especially in labour-intensive departments like defence, health, justice and the police.

In Limpopo, for example, compensation accounts for 71% of the health budget, up from 58.9% in 2008/2009.

The upshot is that compensation expenditure has absorbed an ever larger share of total spending over time, accounting for 35.3% now, up from 32.9% in 2008/2009.

In addition to above-inflation wage increases, treasury attributes the strong rise in remuneration to the introduction of occupation-specific dispensations which boosted the wages and conditions of service of many, including teachers, nurses and police officers.

Promotions and salary progressions (which should be performance-linked incentives but have in many sectors become automatic) have further increased the wage bill while ensuring an upward drift in the distribution of personnel across pay scales. For instance, the proportion of public servants earning above R20,000/month has climbed from 17% in 2008/2009 to 37% today while the average annual salary (in real 2016 rand) has climbed from R260,000 to R338,000 over the same period.

“There is no alternative to disciplining government expenditure if SA is to avoid a trajectory of continuously rising government debt and debt-servicing costs,” says Sanlam economic adviser Jac Laubscher. “As difficult as it may be, the public-sector wage bill will have to be reduced.”

What it means: Public servants are better paid than most other than taxpayers; a tight 2018 publicsector wage deal is crucial