Cutting the public sector wage bill won’t fly: The key is to manage it better

COMMENT

The South African government is set to spend R2-trillion during the 2020-21 financial year, with R675-billion or just more than 35% of the budgeted amount earmarked for salaries.  This means that of each rand spent by the government, 35 cents goes to its employees: teachers, nurses, police and the administrators.

All in all, the government employs 1.3-million people (excluding local government), representing 12% of total nonagriculture formal sector employment. The amount of money spent by the government on its employees is increasingly becoming a vexing challenge to the finance authorities and a downside fiscal risk expected to deepen the ongoing national debt problem and slow down the rate of economic recovery.

In his recent medium-term budget policy statement, Finance Minister Tito Mboweni noted that the government wage bill has increased threefold over a 14-year period: from R154-billion in 2005 to R675-billion in 2020. In the same period the total employment headcount increased by 170 000: from just more than 1.1-million to 1.3-million employees.

Underlying this purportedly exponential growth in the salary bill is the so-called above-inflation wage increases secured by the trade unions over the years, as well as a hallmark staff attraction and retention strategy called the occupation-specific dispensation, which was agreed to in 2007.

The salaries of low-paying occupations and middle management have been increasing at a nominal average rate of 8% a year (2% when inflation is factored in) , while the occupation-specific dispensation has in effect widened the salary bands to improve public sector competitiveness. For instance, at the time it came into effect, the occupation-specific dispensation increased the starting salary package of a teacher with a four-year degree, from R79 000 to R90 000.

Speciality professional nurses benefited the most, with their starting salaries doubling, from R80 000 to R160 000. The occupation-specific dispensation was accompanied by a range of other improved perks, including a slightly higher housing allowance and medical aid contribution, as well as a performance-linked accelerated pay progression.

It would seem from these developments that the government has been overly generous in awarding wage increases or imprudent in keeping the wage bill in check. But there is more to the compensation costs than meets the eye.

Much as R675-billion seems too high a figure to be remitted into the pockets of state employees whose productivity and commitment levels are a subject of ongoing concern, the wage bill remains within tolerable levels or at least consistent with historical precedence. Compensation of employees as a proportion of total consolidated spending decreased from 33% in 2004 to 31% in 2011 and started increasing again in about 2013-14, before levelling off at the current 35%.

The swings are broadly explained by the gross domestic product (GDP) growth factor. Stronger growth years between 2004 and 2007 portrayed a false signal of a declining wage bill because the GDP was rising faster than compensation expenditure. When the economy eventually took a knock from the 2009 financial crisis, salaries maintained an above-inflation growth rate, and GDP growth stagnated at an annual average of 1%.

This created an illusion of runaway personnel costs. Yet, in the education sector, the share of salaries relative to total education spending remained largely flat at 70% since 2004. Salaries for healthworkers and the police have increased by 8% and 10% — to 64% and 80%, respectively — during the same period. Higher personnel costs in these sectors are unsurprising because they are traditionally labour intensive.

There is no denying that a rising wage bill is cause for concern. Salaries tends to crowd out other important public expenditure needs essential for growth and overall socioeconomic development. More importantly, wage increases can widen the budget deficit, if not accompanied by tax revenue growth.  It is for this reason that both domestic and foreign financial markets take keen interest in the size of the wage bill as a key indicator of a country’s fiscal health.

Although there is no consensus on what the optimal size of the wage bill should be, cross-country comparisons do provide a reference point. On average, personnel spending absorbs nearly 20% of total spending in developed countries and 30% in emerging economies. With South Africa sitting at 35%, the authorities are arguably justified in becoming agitated. But international comparisons can be misleading if they are not accompanied by a context-specific analysis of the push-and-pull factors underlying the wage bill and its composition.

The South African government has inherited a unique staffing problem that lingers to this day because of the legacy of apartheid. It received a combination of an overstaffed education personnel complement, following years of overinvestment in teacher training by the Bantustan governments and critical staff shortages in health and the police, especially in the rural areas.

Post-apartheid reforms necessitated that the government rationalise salaries, introduce new staffing norms and adapt international staffing standards recommended by various world bodies. A pupil teacher ratio of 1:30 has been achieved, but reaching the World Health Organisation recommendation of one doctor for every 1 000 people remains an elusive ideal.

Ironically, doctors represent more than 50% of government employees purported to be overpaid — earning more than R1-million a year. Yet, disturbing stories about overworked public healthcare professionals who are leaving their profession are a common occurrence. Unfortunately, their efforts are often eclipsed by the prevalent of incidences of medical negligence and poor quality care.

This conundrum of a coexisting high wage bill and undesirable service levels or staff shortages challenges the simplistic framing of public salary spending as being bloated. The recent figures on income inequality in South Africa by the World Inequality Database — which found that 10% of the population earn 65% of income — are likely to place the wage bill under pressure as trade unions agitate for better income redistribution.

The wage bill may not be appropriate as an instrument to achieve redistribution, but the government may find itself on the back foot if it approaches the negotiating table without bold proposals for greater wealth taxes. Studies indicate that workers’ share of national income has been shrinking, while profits are rising. Again, this complexity shows that the discourse about public-sector salary spending needs more nuanced reflections instead of popular labels. Without such nuanced thinking, the solutions to the problem will be feeble.

The proposals on the table to cut or freeze salaries, as well as the offer for early retirement benefits, are all commendable but will serve only to reinforce inequality and unemployment, reduce public-service levels even further and, as a result, undermine the legitimacy of the government.

The solutions for South Africa lie not so much in cutting the wage bill, but rather in investing in better human-resources management capabilities. This could include appointing the right people in the right positions at correct grades, shifting more personnel to frontline positions, exercising diligent performance management and re-emphasising labour productivity. A higher wage bill may be justified if public sector productivity grows faster than wage increases and induces overall economic growth.

Eddie Rakabe is an independent researcher and economist