February 23 2022 - Minister Enoch Godongwana speaks to the media at the Imbizo Media Centre in Parliament, Cape Town. (David Harrison)
Finance Minister Enoch Godongwana’s maiden budget speech struck an upbeat tone this week, suggesting that the country’s fiscus would reach stability sooner than previously anticipated.
But a lot still hangs in the balance before the period of fiscal consolidation is brought to a close. Chief among those uncertainties is the size of the public sector wage bill and whether the government can keep it contained.
The wage bill — which, according to the budget, cost R665.1-billion in the 2021-2022 financial year — has been the subject of scrutiny by ratings agencies and a significant hurdle on the country’s path towards reclaiming investment grade standing.
Speaking to the Mail & Guardian on the sidelines of a post-budget event on Thursday, the treasury’s director general, Dondo Mogajane, underlined the importance of bringing the wage bill in check, if the government is to achieve fiscal sustainability.
“If you are going to have any sort of permanent sustainability against what is essentially a windfall, you are going to have problems,” he said.
Referring to upcoming public sector wage negotiations, Mogajane added: “We have to be practical about the conversations we have. We said in this budget that a larger wage bill is a huge risk. It will blow it up. It will blow this budget up.”
There is light
Mogajane’s foreword to the budget review tabled on Wednesday was particularly hopeful. Reflecting on a period that has been characterised by the deterioration of public finances as the country’s economy endured shock after shock, the director general said: “It has been an extraordinarily difficult adjustment, but there is light at the end of the tunnel.”
South Africa, the review said, has lurched closer towards achieving fiscal sustainability. The government expects to achieve a primary surplus, where revenue exceeds spending, by 2023-24, a year earlier than previously expected.
The last time this occurred was before the global financial crisis ripped through economies around the world in 2008. Since then, South Africa has experienced more than a decade of stagnating economic growth.
The fiscus has, however, been helped along by a boom in commodity prices and a R180-billion revenue windfall brought in by mining houses.
But this light at the end of the tunnel has its caveats, including what happens with the public sector wage bill.
The treasury has had to take into account two events that could signal a turn in the fate of the public purse. At the upcoming wage negotiations unions could ask for more than has been set aside in the current budget. A new round of collective bargaining will begin next month. The treasury has only pencilled in a non-agreement, which would lead to the government again shouldering the cost of the over-budget gratuity awarded to workers in 2021. The 2021 budget resulted in public service compensation spending increasing by R20.5-billion.
The treasury is also awaiting a constitutional court ruling on whether it will have to implement the final leg of the 2018 wage agreement, which required the government to shell out more money than it was willing to pay. If the apex court rules in favour of labour, the budget review noted, there could be a significant increase in compensation costs and implications for the employee headcount.
SAA (South African Airways) workers and union members sing and dance during a picket protest outside O.R. Tambo International Airport in Johannesburg, South Africa, on November 15, 2019. – The South African airline company has cancelled nearly all its domestic, regional and international flights scheduled for November 15, 2019 and November 16, 2019 following the announcement by the South African Cabin Crew Association and National Union of Metalworkers of South Africa (Numsa) that their members will go on strike from November 15, 2019. (Photo by Michele Spatari / AFP)
Simple, straightforward
“We have to be careful,” Mogajane told the M&G, referring to the wage negotiations. “Can we afford to increase the baseline by R60-billion? I don’t think so. Something will have to give. Other expenditure must be looked at. Can we cut budgets elsewhere? I don’t think we have room to cut any further.”
The government, Mogajane said, has been talking about putting money towards productive sectors of the economy, “away from consumption and into productive sectors. Now, in my book, wages form part of consumption.”
“So let’s be realistic,” the treasury director general added. “It’s a worry. I hope it doesn’t come to that. I hope we’re not going to be forced to actually pay what you cannot afford.”
At an event on Wednesday night, Godongwana was somewhat less diplomatic than his director general about what a higher wage bill will mean for the public service.
“What will I do if it is above what we have set? Anybody who agrees to a bigger amount must know that they will find it in their own budget,” he said.
“Simple and straightforward. There is no money … Unfortunately what will happen is budget cuts.”
Mogajane noted that the government’s ability to reel in the public sector wage bill has been something credit ratings agencies have been keeping a watch on for years. Treasury officials met S&P Global on Wednesday and will be meeting other agencies next week, he said.
“They will be concerned about this risk. So we can choose to remain in junk, where our debt service costs are R303-billion,” he added.
“Our debt servicing costs are more than what we are budgeting for health … It’s unsustainable. It is going to be expensive. So I would say, let’s contain this. Let’s be responsible.”
Market friendly
The budget was generally well received by analysts. On Wednesday, after its tabling, Johann Els, the chief economist at Old Mutual Investment Group, called Godongwana’s speech boring and “market friendly”.
“It may have been boring — but boring is good. As a result, this budget means ratings have very likely troughed and I expect further positive ratings news. Moody’s could potentially upgrade their current ‘negative’ outlook to ‘stable’ in the near future,” he said.
Although the overall message about the future is strong, “[it] is equally clear we are not out of the woods yet. However, fiscal risk has reduced substantially over the past two years and there has been a better than expected recovery. It is clear we are in a vastly improved position with significantly less debt default risk compared to two years ago.”
Investec chief economist Annabel Bishop said that, overall, the budget is solid and pleasing.
“But there are still multiple risks which could derail it, including political [risks] in South Africa. Tax payers experienced slight relief for fiscal drag, while the focus remained on reducing debt projection and this was positive for the bond market as borrowings ease compared to projections. But on balance the budget is likely to be viewed as credit neutral by the rating agencies.”
In its analysis of Godongwana’s budget, Fitch Ratings noted the improvement in South Africa’s public finances. Last December, Fitch revised the country’s credit outlook from negative to stable.
“However,” the ratings agency said, “continuing breaches of expenditure ceilings point to difficulties in containing spending, and there is a risk that recent strong revenue growth may prove temporary.”
The budget raises questions about the government’s ability to pursue fiscal consolidation if revenue forecasts disappoint or other spending risks materialise, Fitch said.
“Its fiscal consolidation strategy relies on containing public-sector wages, which have grown strongly in the past decade. While there are still risks from a pending constitutional court ruling, the government has been relatively successful in containing wage growth during the pandemic, but the recovery in economic growth and stronger public finances may make the public-sector wage negotiations due to start in March 2022 tougher.”
Investment grade is a bonus
When asked whether the “light at the end of the tunnel” includes the prospect of South Africa being lifted to investment grade, Mogajane said: “Yes. We’ve committed to that.”
“The minister was pushing us towards this. I said, ‘Minister, let’s meet with all the ratings agencies.’ When there is an action, there is always an indication as to why and what will get us out of a downgrade … So we know what it will take to get us out.
“So yes, there is that light. Others say it is a train. But I say, it’s not. It is a light and I can see the other side.”
In a brief interview with the M&G on Thursday morning, Godongwana would not let the public sector wage bill occupy all of his attention. “It is not just the public sector wage bill. The total cost out of government needs to be reined in. We need to rein in the wage cost, we’ve got to deal with inefficiencies. We’ve got to deal with corruption.”
When asked whether he has his sights on investment grade, the minister said: “The position I’ve taken is that investment grade is a bonus. But for now, I need to get public finances right. I need to get services delivered on the ground.”
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