The public sector wage bill is not the key factor behind the country’s fiscal crisis, a former head of the National Treasury budget office, Michael Sachs, says.
Fiscal consolidation would lead to further withdrawal of core services, rather than an improvement in efficiency, Sachs said on Wednesday while presenting a paper on the public service and the budget at a webinar. There was very little evidence that the government’s employment structure was deficient, “a widely held view in public discourse”.
He said it was sometimes believed that government employees were overpaid and unproductive, and therefore reductions in their numbers and pay could be achieved without negative effects on public service. “Bloating, if it exists, is concentrated in political and executive offices, economic regulation, infrastructure services, and public administration — particularly finance and co-operative government.”
Sachs’s comments come just as Enoch Godongwana, the finance minister, is expected to maintain fiscal consolidation efforts by keeping a lid on government consumption spending in his medium-term budget policy statement in a week’s time.
Sachs said the solution to the fiscal crisis was not consolidation but a new path, where public sector pay could be matched with productivity.
“That’s the problem. For the last 10 years, finance ministers have been imposing fiscal constraints on a government that is unwilling to make fiscal consolidation a central feature of its programme, and as a consequence you get all of these perverse outcomes,” Sachs said.
“What we need is a public sector compact that takes account of the needs and expectations of public sector workers, the pressure towards fiscal consolidation, and the needs and expectations of the user of public services that puts on the agenda a public sector reform agenda and save[s] the public sector in this difficult situation.”
So far, Godongwana’s time as finance minister has been marked by strict adherence to fiscal discipline, with budget expenditure sitting at 40% in August 2022 compared with over 41.5% in 2021.
According to the Reserve Bank, 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 warned that while the near-term fiscal position remained strong, consistent with the government’s fiscal consolidation programme and helped by revenue windfalls, there were material risks to spending over the medium-term expenditure framework. These included wage increases that were larger than budgeted for and further support to state-owned enterprises.
“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.”
Public sector wage negotiations started in May for the current fiscal year, which began in April. The initial demand from unions was for a 10% increase, later lowered to 6.5%.
Cost to fiscus
The government’s latest offer is a 3% increase, while continuing with the R1,000 (monthly) after-tax cash payment, which started in April 2021 and will end in March 2023.
The offer will nudge up the deficit and debt ratios if the amount is not funded by higher projected tax collections or expenditure cuts.
Absa chief economist Peter Worthington told Business Day that each one percentage point in the public sector pay deal would cost the fiscus R6.5bn, or about 0.1% of GDP.
Nedbank said an agreement on a 6.5% wage increase would require R28bn to be added to the wage bill for 2022/2023.
“Furthermore, this higher baseline will raise the 2023/2024 and 2024/2025 wage bills by R81bn and R103bn, respectively, assuming 6.5% wage growth,” Nedbank analyst Reezwana Sumad said.
Sachs said the current structure of collective bargaining focuses solely on the value of annual cost of living adjustments, without any meaningful discussion of productivity.
“The Treasury is focused solely on fiscal consolidation, without apparent concern for the harmful effects on public services,” Sachs said.
“The presidency and sector departments in provincial and national government lack any coherent plan that acknowledges, let alone plans for, the impact of the fiscal shock taking place, preferring to focus on capital spending projects and new programmes that add further pressure to the fiscus.”
He said budget allocations had not kept pace with pay increases agreed to by government, and spending on compensation of employees had been contained within strict limits for many years.
“Cabinet has been deciding to increase pay while adopting budgets that effectively invalidate its own decisions,” he said.
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