Time to curb SOE wage bill

PRIORITY: STABILISING PUBLIC FINANCES

Increased expenditure on wages and benefits reduces the chance of more employment.

This month the eyes of the world fell on new Minister of Finance Tito Mboweni, as he detailed the mid-year state of South Africa’s budget. Mboweni said decisive action would support more rapid economic growth and sustainable public finances. While this sounds simple enough, SA faces a vast challenge in stabilising public finances given the current weak financial state of a number of state-owned enterprises (SOEs).

Mboweni made two statements that will impact on SOE staff:

Without restructuring, there’s a significant risk that SOEs’ weak financial condition will put major pressure on public finances.

The main driver of increased spending is large increases in wages and other employee benefits, rather than increases in employment.

Restructuring an organisation, particularly to cut costs through increased efficiency, often results in retrenchments.

Adopting policies to limit the increases of wages and benefits within SOEs would almost certainly result in industrial action, as a large percentage of employees within these enterprises are unionised and have traditionally resorted to striking over wages.

However, this is a daunting but necessary task, as the cost of servicing SA’s debt is becoming unsustainable.

It’ll reach about 18% of all government expenditure by 2026 if South Africa doesn’t improve its economic growth outlook.

The Reserve Bank says employee compensation has consistently increased above inflation.

Meanwhile, unemployment has been rising, providing even more evidence to the medium-term budget policy statement position that “the main driver of increased spending is large increases in wages and other employee benefits, rather than increases in employment”.

One reason offered for increased wages and benefits expenditure in the lowest ranks of public service was that this reduces the wage gap.

But SOE pay exceeds private sector pay across all levels of general staff. While accelerating SOE lower-level employees’ increases of wages and benefits seems noble, there needs to be a link between pay and productivity.

If pay is raised without increased production, the unit labour cost of staff increases, ultimately driving up the wage bill relative to production. Within most organisations, salaries and wages form the largest expenditure line item and the same is true within government and SOEs.

The question of whether to restructure the organisations’ design or rein in the rate of increases is controversial, given the state of the economy and the plight of lower level employees. Employment is critical to the economy and the current unemployment rate is unsustainable if SA is to become a more equitable society.

Conversely, tackling the issue of inflation-plus increase expectations is a monumental task, given the rampant industrialised action over wages.

The answer will most likely sit somewhere in the middle.

A model of redistribution of employees (to improve productivity) rather than termination of employment, with more realistic increase demands would alleviate both concerns.

This process would require all stakeholders to work as one to find the optimum economic path for labour and government.

Bryden Morton is executive director and Chris Blair CEO at 21st Century

Cost of servicing SA’s debt is becoming unsustainable