/ 23 February 2022

Public sector wage bill still a threat, even as fiscal outlook improves

South Africa's Finance Minister Enoch Godongwana Presents Budget
Dondo Mogajane, director general of the South African National Treasury, Enoch Godongwana, South Africa's finance minister, David Masondo, South Africa's deputy finance minister, and Edward Kieswetter, commissioner of the South African Revenue Service (SARS), (left to right), make their way to the budget presentation in Cape Town, South Africa, on Wednesday, Feb. 23, 2022. South Africa cut corporate taxes and set more ambitious targets for reducing debt, after a surge in commodity prices led to higher-than-expected tax income. Photographer: Dwayne Senior/Bloomberg via Getty Images

The rosy fiscal outlook for 2022 hangs in the balance if the government cannot contain the public sector wage bill.

Tabling the budget review in parliament on Wednesday, Finance Minister Enoch Godongwana reiterated the government’s commitment “to controlling those parts of the budget that are permanent in nature, including by arresting historically rapid increases in the public sector wage bill”.

Godongwana’s predecessor, Tito Mboweni — who faced a far more dire fiscal outlook — was preoccupied with slashing the wage bill. According to the 2022 budget, efforts to rein in the bill have not been in vain, with the rate of its growth successfully reduced. 

Between 2014-15 and 2019-20, public sector compensation grew at an average annual rate of 7.3%. Between 2019-20 and the end of the medium‐term expenditure framework period, it will grow at 2.1% a year. Growth in the wage bill has been tempered by the government’s decision not to implement the final leg of the 2018 wage agreement, which exceeded what was budgeted for. The wage agreement, and whether it will be upheld, is still the subject of a legal battle at the constitutional court

Unions took the government to court to compel implementation of the 2018 wage increase, arguing that the decision not to implement it was an attack on collective bargaining. The government argued that the agreement was unlawful. 

The labour appeal court sided with the government and unions took their case to the constitutional court, which has yet to rule on an application to overturn the lower court’s decision.

The public sector wage bill still poses a significant risk to the recovery of South Africa’s public finances, the budget review notes. The 2021 public sector wage agreement exceeded what was budgeted for, resulting in a spending increase of R20.5-billion in 2021-22.

If the apex court finds in favour of public sector unions, compensation costs could significantly increase. This, the review notes, will have implications for worker headcount.

Compensation spending will increase marginally, from R665.1-billion in 2021-22 to R702-billion in 2024-25, at an average annual rate of 1.8%.  

A new round of collective bargaining will begin in March this year. If a new deal is not reached, the 2021 wage agreement — which awarded workers a non‐pensionable cash gratuity — will still apply.

A higher 2022 agreement is provided for in the current budget. But baseline adjustments in previous budgets did not fully accommodate the gratuity costs and the effect of the Covid-19 pandemic, placing pressure on provincial health and education compensation budgets. 

To alleviate this pressure, a portion of the government’s revenue overrun has been allocated to provinces, where the majority of expenditure goes to paying employees.

The budget has allocated R24.6-billion for provincial education departments to address the shortfall in compensation budgets. A portion of the R15.6-billion that has been allocated to provincial health departments will be used to appoint medical interns and community service doctors.

The South African Police Service will also receive an additional R8.7-billion over the medium-term, of which R2.9-billion is to cover costs arising from the 2021 public service wage agreement. The remaining allocation will enable the department to appoint 12 000 entry‐level constables.

The treasury has said that allocations to compensation budgets do not constitute a bailout. Rather, efforts to re-capacitate departments are aimed at reversing the erosion of basic services. 

The 2021 budget pencilled in low compensation growth in the basic education sector, based on the reduction in the number of available teachers. That budget also cut R50.3-billion from the health sector. Most of this cut was focused on reducing compensation.