/ 28 October 2020

Mboweni plans to freeze public sector wage increases for the next three years

Striking for their rights: Cosatu members protesting in Johannesburg. The trade union federation has previously threatened to dump its alliance with the ANC if planned cuts to the public-sector wage bill go ahead. (Delwyn Verasamy/M&G)

In his medium-term budget policy statement (MTBPS), Finance Minister Tito Mboweni has forged on with his plans to reduce the public sector wage bill  — and other non-interest spending — to squeeze the air out of the country’s ballooning debt and fiscal deficit. 

He has proposed that the public service wage increases be frozen for the next three years. 

But it also proposes an increase of 1.8% in the current year and average annual growth of 0.8 % over the 2021 medium-term expenditure framework (MTEF) period. 

Covid-19 saw the government putting together a R500-billion stimulus package that increased its spending to mitigate the effects of the pandemic. This resulted in the budget deficit increasing from 6.4% of gross domestic product (GDP) in 2019/2020 to 15.7% this year. The gross national debt has risen from 63.3% of GDP in 2019/2020 to 81.8% — or R4-trillion — of GDP in the current year.

Mboweni’s main focus is to cut the country’s main budget deficit from 14.6% of GDP in 2020/2021 to 7.3% by 2023/2024. If this is done, it is projected to stabilise the gross national debt at 95.3% of GDP by 2025/2026.

The reduction of non-interest spending could save the fiscus R300-billion. 

The treasury also intends to continue spending on capital grants and infrastructure investment as part of the government’s economic recovery plan.  

Spending could also be reduced by lower estimated spending by the National Skills Fund and the sector education and training authorities of R2.8-billion in 2021/2022. 

Mboweni first proposed slashing the wage bill in his February budget speech, in which he said R160-billion should be cut over the next three years. The proposal in today’s medium-term budget policy statement is likely to accumulate to R160-billion. 

But unions have been insisting that the government adhere to their 2018 wage agreement

The matter has been dragged before the courts, but the treasury said in its MTBPS that it was aware of the disagreement and is “actively engaging with” the unions to find a solution to a more sustainable cost of public sector employment. It added that the government is also coordinating work relating to developing a comprehensive public-sector remuneration strategy for the medium to long term. The strategy will seek to better balance competing interests based on fairness, equity and affordability.

Mboweni’s plans to cut the salary bill come at the time when the next round of wage negotiations are due to start soon

Covid-19 has worsened the country’s fiscal position. According to the treasury’s mid-term budget: “Returning the public finances to a sustainable position requires large adjustments. Government spending remains too high for the tax base — and this gap has likely increased as a result of the 2020 recession.”

It is proposed that government’s non-interest spending be reduced by R60-billion in 2021/2022, R90-billion in 2022/2023 and R150-billion in 2023/2024. 

The non-interest spending between 2007/2008 and 2011/2012 grew by an annual average of 14%, which is attributed to factors such as an increase in public service compensation and an expansion of social grants. The government introduced a salary expenditure ceiling in 2012 and 2013, but it only constrained expenditure growth. 

The main budget revenue is expected to improve as a share of GDP, increasing to 24.9% by 2023/2024 while non-interest expenditure is expected to decrease as a share of GDP, according to the mid-term budget statement. The proposed steps are an attempt to reach a main budget primary surplus by 2025/2026.