DAWIE ROODT: State wage bill to blame for SA’s financial mess

Wednesday’s budget confirmed what we already know — the state’s finances are in such a state of decay only extraordinary action can save us from an economic disaster. 

There are many reasons why we got to where we are. We know of the plunder, corruption and good, old-fashioned incompetence. But of all these reasons, the stranglehold organised labour has over the governing party must count as the single most important reason for the collapse of the state’s finances.

The budget, which plans to spend R1.827-trillion (consolidated) over the next financial year, is also a budget that plans to employ roughly 2.25-million people (by our estimates) to spend this money, equal to an average of R811,801 per public servant. Of this R1.827-trillion, R627bn will be used to pay for their labour, which leaves R533,078 per public servant to be utilised on other goods and services provided by the state.

Since the financial crisis of 2008 total state spending has risen by 171%, while the wage bill has increased by 197%. But since 2008 the number of civil servants employed by the consolidated government has also increased by 30%. Over the same time inflation increased by 72%.

Adjusting for inflation, the average civil servant’s remuneration increased by 125% over this period, while the amount of money used to provide goods and services to the country rose by only 159%, or 87% after adjusting for inflation. Put differently, since 2008 the total increase in state spending was primarily used to increase the salaries of civil servants, while the amount of money that is supposed to deliver services to the country hardly increased by comparison.

Perhaps the productivity of the average public servant increased to support higher salaries, despite less money spent on goods and services provided by the state? To determine if this is true, the change in the real output of the government sector, a proxy for productivity, can be measured over time.

Since 2008 the real output of the government sector increased on average by 2.5% annually, while the average wage of public servants increased by 12.9%. This means the average public servant’s wage increase was 10.4% more than their productivity increase. Accumulated over the period this adds up to an above-productivity increase in wages of 114%.

But this approach assumes that all productivity increases can be attributed to labour, and productivity increases attributed to capital are zero. This is wrong of course. Based on   Reserve Bank statistics, the increase in productivity can roughly be split evenly between labour and capital. Assuming the same ratio for public servants, they accumulated an excess increase of wages above their productivity increase of 128% for this period.

This also means the state’s high and above market wage offer is not effective in attracting particularly productive individuals, which is further emphasised by the dismal performance of labour-insensitive services such as education and health. 

Compared to most other countries, SA compares favourably in terms of the number of civil servants employed, namely 14% of the total number of people employed in the country — a little more than developing countries but significantly fewer than developed countries. Also, SA’s total state spending, at 33.7% of GDP, is in line with most other countries.

But when SA’s wage bill is measured as a ratio of total spending and of GDP, the wage bill is significantly higher than most other countries, especially compared to emerging economies. So, though total state spending is not particularly high compared to others, our wage bill is much higher than most other countries.

Another approach to measure the output per public servant is to use IMF comparable data to determine how many civil servants are required to administer a certain-sized economy. Additionally, the government expenditure data can be utilised to determine output per public servant.

On both these measures SA compares dismally with developed and developing countries. For instance, the average public servant in SA produces about half of what the average public servant in Turkey produces. But to be fair, SA’s production per public servant is better than countries  such as Brazil and Russia.

In summary, the average civil servant in SA is not particularly expensive and the civil service is not necessarily overstaffed. What is clear, however, is that the rate of wage increases in recent years has far outstripped the rate of productivity improvement for most civil servants.

• Roodt is Efficient Group chief economist.