Gordhan must focus on govt wages, interest payments

2017-02-21 05:00 - Lameez Omarjee

Johannesburg – Sticking to the expenditure ceiling and a further commitment to cutting wasteful expenditure would be a positive signal to rating agencies of government’s commitment to reduce debt.

However, public sector wages and interest payments are expected to weigh heavily on the budget.

Sanisha Packirisamy, economist at Momentum Investments, said that the wage bill is one of the “largest drags” on the fiscus.

According to the International Monetary Fund, excessive real wage growth is the “main culprit” behind the “exorbitant” wage bill. South Africa’s wage bill is one of the highest in the world as a share of GDP.

This escalation has been driven by public sector hiring. The public wage bill to GDP is up from below 12% before the global financial crisis to about 15%. Public sector worker wages are currently consuming almost 40% of government’s non-interest expenditure bill.

Public sector wage bill

Source: Treasury, Momentum Investments

Further, government’s interest bill is also a concern. Nearly 12 cents of every rand of state revenue goes towards debt-servicing costs. This is the fastest-growing expenditure item for the fiscal years between 2016 and 2017, and 2019 and 2020.

“The rapid rise in debt-servicing costs is crowding out other social and growth-enhancing spending priorities and has been raised as a key concern by the rating agencies in the past,” said Packirisamy.

Government debt and interest (% of GDP)

Source: S&P

The weak state of state-owned enterprises is a further threat to government’s debt levels. Treasury’s contingency reserves currently sit at R6bn for the fiscal years 2017 to 2018, R10bn for 2018 to 2019 and R20bn for 2019 to 2020.

Government will be implementing structural reforms to ensure political and economic stability and to maintain its investment grade rating, said Packirisamy.  

“Government has prioritised cost containment and curbing corruption through its Chief Procurement Office,” said Packirisamy. It aims to achieve savings of up to R25bn a year by 2018/19.

Tax increases and expenditure cuts set in the mini budget  last year have to be adhered to if Treasury is to deliver a positive budget, said Old Mutual Investment Group senior economist Johann Els.  

The mini budget set out targets for R20bn in expenditure cuts and R28bn in tax increases, to achieve the R48bn contraction in the deficit, said Els.

“With the current fiscal year running R5bn short, due to slower tax growth and slight over-spending, they will need to go bigger on tax increases and expenditure cuts this year to make this up,” he said.

“Whether or not they actually do take these necessary steps remains to be seen, but it will be a very big positive if they do as it will be a departure from the historical trend.”

“The risk of tax increases in this year’s budget is that, while we know that hikes will happen across the board, we don’t want Treasury to become too reliant on tax increases over the prioritising of expenditure cuts,” he added. “Expenditure cuts are more challenging given that public sector wages, social grants and interest payments make up 60% of the total expenditure budget,” he added.

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