Public sector wage bill could test tax tolerance
Bloated civil service wages could tip taxpayers over the edge
● South Africa’s burgeoning public sector wage bill could push tax tolerance to the edge. Late on Friday the government and unions agreed on a three-year wage deal, the details of which will only be disclosed tomorrow.
Taxpayers are already footing the bill for cashstrapped state-owned companies, a rise in sovereign debt and the debt servicing costs that go with that, and commitments to social grants and infrastructure.
Wage talks began in September last year ahead of the end of the three-year sectoral wage agreement that expired in March this year.
After several rounds of negotiations the government and public service unions agreed to a 7% salary increase for those in pay grades 1 to 7 and a 6.5% increase for pay grades 8 to 10 in the first year. Employees on level 11-12 get 6%. Increases for the next two years of the wage agreement would be disclosed tomorrow.
Public sector unions were demanding an increase of CPI plus 2% for the lowest levels and CPI plus 1% for higher-ranking officials. Labour’s inflation is benchmarked at 5.5%. The wage agreement will run until 2021.
For every additional 1% above CPI it will be necessary to cut around R6-billion in government expenditure or raise the equivalent in revenue, research from Citibank showed this week.
Gina Schoeman, Citi’s South Africa economist said: “Both sides can’t win. We are concerned that the Treasury budgeted for 7.3% growth in compensation of employees [for the three-year wage-agreement]. Because this looks unlikely in our view, the October 2018 medium-term budget policy statement will have to find a way around this — an unfortunate misstep when trying desperately to keep to an appropriate revenue-expenditure mix of fiscal consolidation.”
The government’s consolidated wage bill is projected to expand by an annual average of 7.3% over the next three financial years.
South Africa’s wage bill is one of the largest single spending items, accounting for 35% of the R1.67-trillion national budget this year, and consumes 14% of GDP. This ratio ranks the country’s wage bill above that of other emerging market and developing economies.
India’s wage bill as a percentage of its GDP was among the lowest of emerging market economies at just above 5% about two years ago and Russia’s was at slightly under 10%. Colombia’s public sector compensation has been hovering at about 5%, according to data collated by the Organisation for Economic Cooperation and Development (OECD). The collective public sector wage bill basket of the OECD’s 35 member countries is lower than in Brazil and South Africa at just more than 10%.
Talks between unions and the government also included negotiations over the housing allowance and medical aid, as well as enhancement of the benefit structure for employees at lower pay grades and the abolition of lower pay scales, which may raise the pressure on the fiscus.
The previous wage agreement, which was concluded in 2015, was for a 7% hike in the first year (based on CPI of 4.8% plus 2.2%) and CPI plus 1% in the second and third years.
The government employs about 1.3 million people. Public sector employment grew the fastest during the 2009-10 economic recession as the government was using its fiscal strength at the time to cushion the effects of the global financial crisis. But the consequences are now being felt.
Economists are asking how the state will pay for higher wages without drastically trimming public sector employment, since further tax hikes could be crippling.
Lesiba Mothata, economist at Alexander Forbes, said: “They’ve run out of space for tax hikes. They are probably now at that tipping point. Additional taxes are going to derail growth.
“That’s why there is a screaming need for reforms,” Mothata said, adding that without reform of the labour environment low economic growth and a sticky inflation environment would persist. “We ought to have much lower interest rates because of this inflation outcome.
“But the components of administered prices and the components of wage settlements are creating stickiness in inflation.”
Current consumer inflation at 3.8% was unlikely to slow further. The wage bill was funded by borrowing while the cost of servicing debt had risen because of credit rating downgrades last year.
A higher than budgeted wage hike might boost consumption if public servants had more disposable income, but growth would be poor. If it were not commensurate with higher productivity it would not structurally boost retail activity, Mothata said. “It supports growth but it anchors it at a lower level.”
The wage settlement may also affect inflation projections and the scope for potential interest rate cuts in future.
Schoeman said: “If the [Reserve Bank] governor sees that public sector wages in the outer years are going up by anything more than CPI+1%, which the governor has already said has been too high, they are going to adopt more of a hawkish slant” when it comes to decisions around interest rates. Then rate cuts may be improbable.
Cutting the number of government employees is a way forward.
Schoeman said to save R10-billion through expenditure cuts in the budget would be equivalent to 0.3% of GDP and could narrow the budget deficit to 3.3% of GDP from 3.5% projected for 2020/21.
Ian Cruickshanks, chief economist of the Institute of Race Relations, said the ANC faced an election year and would be less likely to cull employees. But by increasing the “reward per unit, we get even less efficient, then we dig our own grave. Be sure that the international credit ratings agencies are watching that”.
“Maybe it’s government’s last chance to say so far and no further. If they lose credibility, where will they be in the financial markets?”
Gardner Rusike, a director of the largest global ratings agency, S&P, which downgraded South Africa’s ratings to junk, said: “We have a stable outlook [on South Africa]. So, there’s less to worry about.” He said the fiscal year had begun only in April and challenges with municipalities and state-owned entities highlighted by the finance minister in recent days were rather a “signalling“of the current situation than a firm conclusion of matters.
Schoeman said the Treasury may seek to get revenue from underspent municipal and infrastructure budgets to cover a higher than expected wage bill.
Lumkile Mondi, a senior economics lecturer at Wits University, said trimming expenditure could involve merging and cutting down on government departments while some director-general and deputy director-general positions could be merged. But given that Ramaphosa faced an election “he is really trying to walk that tightrope. Populism is everywhere in our country: social media, EFF, radical economic transformers are leading it, so it’s not easy for moderates, for people who are committed to addressing inequality, poverty and unemployment”.
South Africa’s government more costly than in most comparable countries Maybe it’s government’s last chance to say so far and no further
Ian Cruickshanks Institute of Race Relations chief economist