/ 6 June 2008

Pay rise catches govt napping

Last year’s bitter public sector strike lives on in the unexpected multibillion-rand increase in the civil service pay bill announced this week.

Commentators said the award would undermine the government’s attempts to curb inflation and could lead the state into deficit territory.

Public Service Minister Geraldine Fraser-Moleketi announced in Parliament this week that civil servants would receive a 10,5% cost of living increase from July.

This results from the multi-year agreement between government and civil servants reached during last year’s strike which set the formula for salary increases for the next two years at projected CPIX for the year, plus 1%. The intention was to ensure real salary increases of 1%. However, when the agreement was signed, no one expected the CPIX to reach its current level of 10,4%.

Kenny Govender, deputy director general for management of compensation in the public service department, said the department had anticipated a 7,5% salary increase in terms of the agreement. The unexpectedly high CPIX had added R5,2-billion to the wage bill this year, he revealed.

Govender said that the government recognised that public sector increases could impact on inflation and on the economy as a whole, but the purchasing power of employees also needed to be considered. Employees should not have to suffer because of a high-inflation environment, he said. ”The government had to balance that, but can’t erode the purchasing power of civil servants.”

The department is moving towards an occupation-specific dispensation in which specific professions move towards different career and pay structures to retain and reward skilled individuals, such as nurses.
At the beginning of this year, teachers were given a 4% increase in addition to last year’s 7% general pay rise.

Tradek economist Mike Schussler said that the extra billions that will have to be spent on public sector pay could mean that the budget could move into deficit. With the economy weakening, revenue collection is unlikely to meet projected levels, he said. Economic growth was expected to be at 4%, but currently stands at around 2,1%. Schussler said the weakening of the economy would also put pressure on revenue collection. Year-on-year collections of tax and VAT were down, adding to the government’s interest repayments.

Stanlib chief economist Kevin Lings said the public sector increase would undoubtedly hit inflation targeting and raise inflationary expectations in the public. This in turn had implications for interest rate policy. Lings said that settlements in the 2008 wage round were already at around the 10% level, exceeding this in sectors where there was a skills shortage, such as construction. The trend would be reinforced by the increases.

”As soon as government concludes a wage agreement like this, it sets the tone for private sector negotiations,” he said.

Lings said that inflation targets in the South African mould could be achieved only if people’s expectations of the cost of living corresponded with the targets. With tax collection under pressure, both at a personal and a company level, the additional public sector wage bill could help push the economy into a deficit.

The projected surplus was just 0,6% of GDP, he said, and the weakening economy meant that it was unlikely to be achieved.

A small deficit could be managed. But the problems would escalate if the country entered a spiral of growing government debt.

Lings said that at one stage under apartheid, more than 20% of the national budget went to servicing interest payments. Reducing these released money for healthcare and other essential services.