Can he contain the public sector wage bill without sparking more devastating strikes?
Much was said in Finance Minister Pravin Gordhan's budget speech on Wednesday about increasing basic services.
Much was said about the increase of grants, the need for economic growth, and ensuring expenditure is allocated efficiently — enhancing management, cutting waste and eliminating corruption.
But not much was said about the public sector wage bill: the largest single expenditure item that the government has to meet and a known key concern for the treasury.
Public sector salaries made up 39.5% of the government's consolidated non-interest expenditure last year. This will fall to 36% of its gross expenditures in 2014/2015 according to Sanlam's Arthur Kamp. Of the R1.25-trillion total budget, public sector workers will cost R450-billion.
The budget review released by the treasury says the "government continues to strive to shift the composition of spending away from consumption and towards productive investment. The wage bill, however, is affected by the higher inflation outlook.
"Public sector salaries are linked to inflation; when prices rise, so too must the proportion of resources allocated to compensation."
"Little to report on implementation"
Tim Harris, the Democratic Alliance's spokesperson on finance, said in a statement reacting to the budget on Wednesday that the "government has little to report on actual implementation, especially when it comes to … public service reform."
Arthur Kamp, an economist from Sanlam Investment Management, said in a pre-budget briefing that the government wage bill is a "critical aspect of expenditure restraint".
"If the public wage bill is that big a component of government expenditure, it's pretty key that he [Gordhan] brings it down," he told the Mail & Guardian. Kamp said the budget's commitment to keeping wage increases below 7% was fair.
"In real terms it's almost no real increase. He's definitely pretty much sticking to his medium-term framework."
This year, there will be an increase of R21.9-billion "for compensation of employees as a result of higher inflation projections and salary adjustments for clerks".
More than half (R11.7-billion) of this is allocated to provinces and R10.2-billion to the national government.
Compensation budgets increase
According to the national treasury 2014 budget review, compensation budgets have increased by R2-billion in each year between 2010, 2011 and currently. The wage bill will grow by an average of 6.4% over the next three years.
Kamp pointed out that the social grant increases announced by the minister did not actually equate to an increase in real terms for the recipients.
Old-age and disability grants will increase in April from R1 270 a month to R1 350 a month.
The foster-care grant will increase from R800 to R830, and the child- support grant will increase from R300 to R310 in April, and R320 in October.
"In light of the fact that Gordhan can't increase spending any more to the poor and unemployed, it's an incentive to hold his ground with the public wage bill as well," said Kamp.
According to research carried out by the Institute of Race Relations, based on information from the South African Reserve Bank and labour broking company Adcorp, average wages in the public sector were significantly higher than those in the private sector between 2000 and 2010.
Public sector wages
Public sector wages were 12% higher than those in the private sector in 2000; by 2005 the differential was 42%.
Differentials fluctuated between a minimum of 27.4% in 2007 and a high of 43.6% in 2010. The institute has not updated its research since then, but researcher Georgina Alexander said "it is safe to say" that the trend has continued over the past three years.
"There were very high wage increases just after the recession," said Kamp. "We should have had a real jump in capital spending, but instead we stood with very high government consumption levels."
The decision to create fiscal space was "not a policy mistake; that's what you need in a recession," said Kamp.
"The problem was that the treasury didn't intend to go into wages that high. Their projections did not go into those kinds of increases. They set budgets at lower than that, but the wage negotiations [were settled at higher prices] and they had to find the money."
Gordhan has stuck fairly closely to his public wage bill forecasts over the past few years, but he has had the help of multiyear wage agreements, struck in 2010, to assist him.
The real test of his mettle will come this year when the deals are re-negotiated. Gordhan will be pulled in both directions. The need to drive down spending is a real one, with government debt hovering at around 48% of GDP in gross terms.
On the other side of the wage coin, however, is the real threat of devastating strike action. In 2010, civil servant work stoppages contributed to a crippling 20 674 737 working days lost.
This was more than 10 times the number of days forfeited in the years in which public wages were not negotiated. With the bitter taste of this year's platinum strikes still fresh, Gordhan may be tempted to allow for a sweeter deal.