THE wage dispute between government and the unions, which are demanding an 8.6% wage hike and a doubling of housing allowances to R1 000 a month, comes at a bad time when the purse strings are tight. What will a settlement do to government's deficit targets?
The question is all the more topical because of the European fiscal crises that rocked financial markets earlier this year. Led by Greece, but followed by countries suchs as Portugal, Italy, Ireland and Spain, the world grew very worried about fiscal deficits and government debt. Now is not the time to put that at risk.
In Britain the new coalition government, led by the Conservative Party, created an independent Office for Budget Responsibility (OBR). It is the OBR's task to ensure that British budget is based on realistic assumptions.
At arm's length from government, it had to ensure there was no repeat of what happened under the Labour government, when unrealistically high economic growth rates were used to project revenue, deficits and debt. (The higher economic growth, the higher revenue and the better for all fiscal ratios.) This helped Labour present "acceptable" but unrealistic budgets.
Through using the OBR, the Conservatives hoped to portray the situation as much worse than initally thought when they took office earlier this year. But, embarrassingly, the OBR found that things were actually not that bad.
We don't have an OBR, but if we did, it should theorectically have the opposite task to the British one. This is because our government tends to paint a picture that is worse than the reality, and then deliver better figures in the end.
Blood from a stone
A case in point is the government's economic growth forecast for this year of only 2.3% - noticeably lower than the 3% growth rate most economists expect. In doing so, Finance Minister Pravin Gordhan has built in a little fat. Perhaps he was thinking ahead to wage negotiations with the civil service.
But perhaps more important is Gordhan's uncanny ability to get blood out of a stone. As a result of a massive last-minute revenue push, the budget deficit for the 2009/2010 fiscal year came in at 6.7% of gross domestic product, from a projection of 7.2% in February.
That's a significant difference, and evidence of magic. (Some might say it's evidence of bad budgeting, but let's look on the bright side here.)
If Gordhan can get blood out of a stone again this year, he will easily be able to cover the extra cost of the civil servants' pay hike, and might even then get a lower deficit than the 6.5% budgeted for this year.
The only figures we have to go on are the monthly statements of national and provincial government revenue, expenditure and national borrowing. The latest statement is for June. The figures show that for the fiscal year to June (three months), the cumulative rise in revenue is an eye-popping 22.7%. This whopping increase compares to a budgeted rise of 12.6% in revenue.
Under-promise and over-deliver
There's no note to the statements explaining whether there were extraordinary receipts during the period which could explain why 23.3% of total revenue was collected at this point in the fiscal year, compared with 21.1% in the previous year. One may wonder why a quarter of revenue isn't collected after a quarter of the fiscal year, but revenue is highly seasonal.
Interestingly, spending is running below budget, with an increase of only 3.9%. This is quite a bit lower than the budgeted rise of 9.3% for the year. But spending also tends to be lumpy, so one should be careful not to read too much into this.
It's early days yet, but everything points to a lower budget deficit than projected in the February budget. Some of the extra revenue will be eaten up by the civil servants' pay rise, but government is sitting pretty.
This, of course, isn't the message Gordhan wants out there while he's negotiating with trade federation Cosatu. He wants to emphasise the fact that government doesn't have enough money. Ultimately, it's better for the markets to do things the way that Gordhan does – to "under-promise and over-deliver" on his revenue and deficit estimates.
One problem with the civil service eating up so much of government's revenue is that less is available for spending on infrastructure, and for the creation of new jobs.
Though government's deficit targets won't be affected negatively by the extra spending on wages, government and the country as a whole can't afford them.
- Fin24.com