Finance minister Enoch Godongwana is expected to pencil in 3% in the expenditure framework — the government’s latest wage offer that only the SA Democratic Teachers’ Union (Sadtu) has accepted — when he presents the medium-term budget policy statement next week.
Absa chief economist Peter Worthington told Business Day the 3%, on top of the 1.5% notch progression and the R1,000 per month post-tax cash gratuity, would “nudge up” the deficit and debt ratios if the amount is not funded by higher projected tax collections or expenditure cuts.
“Each one percentage point in the public sector pay deal costs the fiscus R6.5bn, or about 0.1% of GDP,” Worthington said. “This 3% wage offer is more generous than the 0% assumption that the government embedded into the 2022 budget, which projected growth of just 2.4% in total employee compensation in the financial year 2022/2023, after accounting for automatic pay progression and continuation of the cash gratuity.”
The long-running standoff between the government and public sector unions over a pay deal for the financial year 2022/2023 may be grinding towards a conclusion.
Last week, Sadtu, which represents about 260,000 of 1.3-million public service union members, accepted the government’s latest wage offer. It said that the proposed 3% wage increase, coming on top of the 1.5% automatic pay progression and continuation of the R1,000 a month post-tax cash gratuity, "was fair at this difficult economic juncture".
The Automobile Manufacturers Association went even further, agreeing to a three-year deal that will see wages increase by 8.5% this year, followed by a likely 7% rise in the following two years.
On Monday, most Transnet workers agreed on a 6% wage increase in the first year of the agreement, backdated to April 1, with 5.5% and 6% increases in the subsequent years.
This was significantly lower than unions’ initial demands of 12% to 13.5%, and lower than amended demands linked to the consumer price index, which rose to a 13-year high of 7.8% year on year in July before easing to 7.6% in August.
The Reserve Bank’s October Monetary Review shows that government spending grew by 5.5% in 2021/2022 and by 1.1% in the first four months of the 2022/23 fiscal year.
The Bank said while the near-term fiscal position remains strong, consistent with the government’s fiscal consolidation programme and helped by revenue windfalls, there are material risks to spending over the medium-term expenditure framework, including larger-than-budgeted-for wage increases for public sector employees and further support to state-owned enterprises (SOE).
“This could potentially crowd out spending on growth enhancers such as infrastructure or worsen the debt trajectory,” the Reserve Bank said. “Because revenue windfalls will fade as commodity prices normalise, sustainability of the fiscus requires the alignment of permanent spending commitments to the more enduring component of fiscal revenues.”
Oxford Economics head of Africa Macro Jacques Nel said wage-price spirals don’t only run the risk of entrenching higher inflation expectations, but also could have severe fiscal implications.
He said increasing public sector wages at the expected rate of inflation — when the latter is at an uncomfortable level — necessitates that this raise be accompanied by a similar increase in nominal fiscal revenue, partly driven by inflation, to allow the increases to be fiscally neutral.
“In reality, however, this is rarely the case. The problem is compounded when these increases are being implemented by a dysfunctional SOE that is highly unlikely to recover these costs,” Nel said. “Reports that the Transnet strike in SA is nearing an end is great news for the economy, but Godongwana will be hoping that similar strikes do not derail his fiscal plans.”
Another key concern that remains is that other key public sector unions, such as health-care workers and police, continue to reject the government’s latest wage offer, “and so it is hard to know for sure when a pay deal will be settled or at what level overall”, Worthington said. “Currently, pay levels are effectively unchanged from the financial year 2021/2022.”
While SA still faces a difficult fiscal consolidation challenge, Absa remains somewhat more optimistic than the National Treasury on the country’s revenue prospects.
Main budget revenue for this fiscal year so far, April to August, is up 10.3% year on year, compared with the 2022 budget projection of just 2.5% growth for the 2022/2023 financial year as a whole.
However, revenue growth in the second half of this fiscal year is unlikely to match the pace of the first five months, Absa said.
“For one, although commodity prices have remained quite elevated, faltering global growth suggests that commodity prices could ease more than consensus forecasts currently suggest. Additionally, intense load-shedding and transport infrastructure problems could hurt mining houses’ operating surpluses and tax contributions,” Worthington said.
Overall, Absa now expects revenue growth in the financial year 2022/2023 of 7.3%, up from 6.5% in their July estimates. This equates to a revenue overrun of R87bn relative to the 2022 budget target.
“But there remains great uncertainty about where the current wage negotiations will settle. We see a strong likelihood of slippage on the National Treasury’s fiscal consolidation plan founded on a three-year pay freeze,” Worthington said.
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