/ 18 February 2010

SA’s rising wage bill a cause for concern

South African’s rising public wage bill may have serious implications for the country’s ability to service its debt.

Salaries to civil servants have all but doubled in the last five years, soaring from R155-billion in the 2006/07 financial year to almost R259-billion in 2009/10.

At the same time, debt-servicing costs — or the interest that government is paying on its loans — are the fastest-growing line item in the budget. They are projected to be R57,5-billion this year but will leap to R71-billion in 2010/11 and are expected to reach to R104-billion in 2012/13.

In a response to Finance Minister Pravin Gordhan’s national budget, the Financial and Fiscal Commission (FFC) in Parliament on Thursday noted the “increase in debt-service cost compared to other items of the budget”.

“In this respect it is also important to note the rapid increase in the public-sector wage bill,” the FFC said in a statement. “This scenario might imply that significant amounts of the debt-service costs increases are driven by personnel expenditure.

“If this is the case it would be important that this development is reversed as soon as possible.”

The Treasury stated in the budget that it will increase state debt levels to an expected 44% of gross domestic product (GDP) by the 2015/16 fiscal year.

Finance Minister Pravin Gordhan emphasised that the government was attempting to carefully balance expenditure against a smaller revenue pool thanks to the aftermath of the financial crisis, which has seen the budget deficit rise to 7,3% of GDP.

Economists have said that the while the debt burden has grown it is still within acceptable levels. They warned, however, that this was not sustainable in the long term.

Kevin Lings, an economist at Stanlib, noted that rising state debt costs are the fastest growing item in the budget. But he said that under the current circumstances increased debt was acceptable, particularly as the government was aiming to bring the budget deficit down to 6,2% of GDP in 2010/11, and 4,1% by 2012/13.

However, he warned that if debt levels were not carefully managed, the country could quickly slide into a “debt trap”, where funds needed for programmes such as health or education are channelled into servicing interest payments.

“Things can get very bad, very quickly,” he said.