Finance Minister Nhlanhla Nene is determined to curb public sector wages. But economists are concerned about the government’s ability to meet the reduced targets for state salaries it has set in this year’s budget – particularly in the light of wage demands by public sector unions for a 15% increase.
As part of efforts to rein in government spending, Nene and his team at the treasury have emphasised the need for inflation-linked increases, and instituted a freeze in the personnel headcount, first announced in the medium-term budget in October.
Spending on the government wage bill is projected to increase by 6.6% over the next three years, lower than rates of more than 8% seen in the past three years.
Speaking to journalists ahead of his budget speech, Nene stopped short of giving assurances that a public sector wage strike could be avoided.
The growth in public sector wages, which accounts for almost 40% of government spending, was a “concerning matter”, Nene said. Nevertheless, government was working hard “to find middle ground and an amicable solution to the wage negotiations”.
In its budget review documentation, the treasury stressed that, if current negotiations result in a settlement “that departs significantly from inflation, government will have to effect substantial reductions in capital expenditure, introduce more stringent controls on public employment or find ways to curtail spending on other critical priorities”.
But Professor Jannie Rossouw, head of the Wits School of Economic and Business Sciences, expressed scepticism over the amounts budgeted for the compensation of government employees. Rossouw, alongside Fanie Joubert and Adele Breytenbach of the department of economics at Unisa, has done extensive work on the country’s “fiscal cliff” or the sustainability of government spending on salaries and social grants.
Compensation of government employees was R402.6-billion in 2014-2015 or just under 40% of government expenditure. This is forecast to rise to R432.8-billion for 2015-2016.
This suggests an increase of about of 7.4%, according to Rossouw, and the increase for 2016-2017 was forecast at only 6,2%.
‘Very uncomfortable about these numbers’
The forecast budget was “too low” in light of the demands being made by public sector unions, argued Rossouw. He noted that increases from the financial years 2013-2014 to 2014-2015, compensation had risen by 8.4%. “Why would it suddenly be lower rather than higher?” queried Rossouw. “We are just very uncomfortable about these figures.”
Given the significant proportion that the wage bill makes to the government finances, “under-budgeting” for remuneration was of grave concern, he said.
If these projections were not achieved it was very likely that there would be over-expenditure. “The money must come from somewhere; that will push up the deficit before borrowing,” he warned.
Private sector economists echoed this view. In a research note the Nedbank economics unit said Nene’s “efforts will be wasted if government employee remuneration is – at least – not kept in line with the 6.6% projected over the next three years and if other cost-containment measures – particularly in other levels of government – are not adhered to”.
“With the costly National Health Insurance system lurking, government’s appetite for large, costly programmes such as the proposed nuclear power project, as well as demands from inefficient and capital-hungry state-owned enterprises, the risk of accidents over the medium term is high,” it said.
Nene stressed, however, that the declines in inflation expectations – at 4.3% for 2015 – could ameliorate wage demands that are linked to inflation.
According to the budget review, a 2014 study conducted by the treasury estimated that most public sector employees were in the top 30% of wage earners nationally.
It noted that higher-income earners “experience inflation in line with or slightly below consumer price index (CPI) inflation. Yet wage demands remain in excess of CPI inflation.”
In a bid to address the wage question, the treasury is launching a comprehensive assessment of compensation budgets to tighten control of the public sector wage bill. The assessment will build on research undertaken by the department of public service and administration, it said.
According to the budget review, a 2011 personnel expenditure review by the department found that:
• Between 2006-2007 and 2010-2011, national and provincial personnel expenditure grew by more than 15% a year, despite little evidence of a corresponding improvement in service delivery.
• There were more than 350 salary scales and 500 different allowances, leading to administrative complexity and providing opportunities for irregular remunerative practices.
• Between 2007-2008 and 2010-2011, total local government personnel spending increased by 60%, from R27.3-billion to R43.6-billion.
Nene stressed that government aimed to protect public servants’ buying power but wanted to see productivity gains from the sector.
He also appealed to departments to moderate their head counts and ensure that, when new employees were taken on, they were part of core functions.
Rife growth in wages
Growth in wages has been particularly rife in provincial governments, where compensation of employees has made up more than half of provincial budgets.
Between 2010-2011 and 2013-2014, the share of provincial budgets taken up by employees increased from 58.4% to 59.9% because of above-inflation wage increases, according to the budget review.
The effect “was pronounced in health and education, which require a large number of employees to provide services”, it noted.
Some positive changes, however, are being realised.
“Provinces have managed the cost escalation by reducing, to the extent that it does not inhibit service delivery, the number of public servants employed,” it noted.
According to the budget review, the total number of staff employed by provinces peaked at 920 826 in 2012 and declined to 915 569 in 2014.
The outcome of negotiations remains to be seen but the treasury highlighted the need for a multiyear agreement to ensure “a stable, predictable wage bill and reprioritisation of resources towards areas of need”.