SA’s public sector wage bill now swallows nearly 35% of the budget and 14% of GDP. Not only is this way out of line with other emerging economies, it is extreme by virtually any measure – including developed economies.

Source: OECD

Wage negotiations currently underway between government and public servants appear to be making progress, having kicked off last year with threats of strikes and protests unless wage demands of 10% to 12% were met.

SA’s roughly 2.7 million public sector workers and government appear to be finding a middle ground, suggesting wage increases for 2018 are likely to come in at around consumer inflation plus 1% to 3%.

A percentage point here or there may seem trifling, but not when you are talking about a wage bill of around R140 billion a year. An increase of inflation plus 1% over three years translates into a shortfall of about R12 billion by 2021 at the national level, and around R13 billion at the provincial level.

Treasury’s Medium-Term Budget published late last year showed public sector wages increased at 10.3% a year since 2009, considerably above the rate of inflation. What was also alarming about the budget was the disclosure that up to 70% of some provinces’ health budgets go to wages.

Source: OECD

Economists and ratings agencies have been sounding the alarm over the ballooning public sector wage bill for years. Government is attempting to shave the headcount by leaving non-critical vacancies in some departments unfilled, but this is not enough. Last year, Mike Schussler, the chief economist at Economists.co.za, warned that SA could no longer afford a bloated civil service, and that the only way out was a massive private sector job creation drive. But that would require government to abandon policies that stood in the way of investment and job growth.

One of the key figures being monitored in the upcoming budget on February 21 is the size of allocation to public sector wages. Adrian Saville, CEO of Cannon Asset Managers, argues that the government wage bill is already at an unsustainable level and any hike will only exacerbate the problem.

“The public sector wage bill in South Africa is, by any measure – be it by SA history or by global measures – at the far end of the spectrum. Whether we are being compared to similar-sized economies, emerging markets, or even advanced economies that tend to have high levels of current spending, the wage bill as a percentage of government spending is one of the highest in the world and is creeping steadily higher,” says Saville.

Source: OECD

Though wages are being spent in the right sectors, such as public education and national healthcare, the results being achieved are dismal, as evidenced by South Africa’s ranking in these arenas in global tables. Adds Saville: “There is no governance and no accountability in respect of the spend. There is no link to outcomes, productivity, or effectiveness and there are no checks and balances in place. This perpetuates a system in which spending continues to rise without regard for impact or effectiveness.

“These wage demands come at a particularly difficult time for the fiscus. State-owned enterprises (SOEs) desperately need further financial injections, but they are seeking funding from a government that is already running an unsustainably large deficit with a growing debt pool. Worse, the return on assets at SOEs stands at around 2% per annum, but this is being funded at a cost to government of 8.5% per annum.”

Another development being keenly studied in the upcoming budget is government’s promise of free tertiary education, which could add another R50 billion to the budget alongside the already announced revenue shortfall of R50 billion, due to overspending and weak revenue growth resulting from the stalled economy.

A study entitled Demographic, employment, and wage trends in South Africa by UNU-WIDER, the Brookings Institution and the Development Policy Research Unit (DPRU) at the University of Cape Town, claims unionised public sector workers have become the new “labour elite”. While non-agricultural private sector employment has been shrinking as a proportion of the total labour force, public sector employment grew to 2.69 million from 2.16 million workers between 2008 and 2014. Nearly 70% of public sector workers are unionised, which helps explain how they were able to achieve a 22% premium over private sector workers at the wage negotiating table.

The OECD’s 2017 Economic Survey of South Africa notes that the public sector wage bill at 35.3% of the budget, and interest on debt at 10%, limits government’s room for fiscal manoeuvre. Despite a freeze on public sector employment in 2015 and 2016, the OECD says further efforts could be made to limit annual wage increases by reallocating workers to areas where they are more needed, such as health and education.

The only long-term approach to stem the growth in the public sector is to implement policies that promote job creation. The OECD recommends much stronger investment in infrastructure and education. That’s been promised for years, but never materialised. Implementing some of the plans the government has in the pipeline – such as minimum wages, national health insurance and free tertiary education – will further stall any hope of a strong economic rebound.

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