Cape Town - A public sector wage bill increase higher than inflation will lead to a massive shortfall in the compensation budget, making the wage talks currently underway a major risk on the fiscus.
“The shortfall in compensation budgets will deteriorate substantially if the public-service wage talks leads to an agreement that exceeds CPI inflation,” the mini budget explains.
“For example, a CPI + 1 agreement would raise the national shortfall in 2018/19 to R8.2bn, with the gap in provincial compensation budgets amounting to R4bn.
“At this level, a three-year agreement would push the national shortfall to R11.8bn by 2020/21, and provincial compensation spending would need to increase by R12.7bn.”
Tough wage negotiations
Finance Minister Malusi Gigaba said government is entering the “difficult phase of wage negotiations”.
“Everyone has to suffer the pain of the constrained economic environment that we are in,” he said. “Compensation of employees should not continue to grow unabated without us reducing the headcount to maintain it at affordable levels.”
The good news is that inflation forecasts have declined, meaning the wage bill can come in lower.
Treasury said the inflation outlook was revised down compared with the 2017 Budget, relieving pressure on inflation-linked expenditure such as the wage bill. The Budget’s inflation forecast dropped from 6.4% to 5.4% in 2017 and from 5.7% to 5.2% in 2018.
National Treasury warned that the “public-sector wage bill has increasingly crowded out other spending and limited government’s ability to increase public employment”.
An imminent risk
It said “public-sector remuneration budgets pose a large and imminent risk, with the possibility that some national and provincial departments will exceed compensation ceilings.
“A new civil service wage agreement, in which salary increases exceed CPI inflation and without headcount reductions, would render the current expenditure limits difficult to achieve."
This situation, Gigaba said, requires determined action that balances competing demands and interests. These trade-offs are particularly stark in the current round of public-service wage negotiations, he added.
“Since 2011, government has been forced to restrict employee headcount growth to accommodate rising salaries. Yet spending on compensation has continued to grow more quickly than nominal GDP. A fair and reasonable compromise between government and state employees in the current round of wage talks is in the public interest.
“The MTEF provides for an overall increase of 7.3% a year to accommodate improvements in conditions of service. Many departments are already at risk of exceeding this limit, even assuming that personnel numbers do not increase.
“Moderation in public-service personnel costs is essential if improvements in service delivery are to be achieved.”
Compensation spending ticks up
Treasury explained that compensation spending has grown more quickly than the overall budget over the past eight years, and accounted for 35.3% of consolidated expenditure in 2016/17, up from 32.9% in 2008/09.
“On average, promotions and notch progressions increase government’s wage bill by 1.5% each year,” it said.
“The combination of salary adjustments, improved benefits and upward progression has resulted in a large increase and equalisation in remuneration levels in the public service over the past decade.
“In 2016/17, nearly 461 000 public servants (37%) earned more than R20 000 per month, up from 17%, or 199 000, in 2008/09. Just 17% earned less than R10 000 per month in 2016/17, compared with more than 35% of public servants in 2008/09.
Based on data from South African Revenue Service tax filings public servants tend to receive higher remuneration than taxpayers in general at every point of the distribution up to the 90th percentile.
“While the income of the median taxpayer in 2014 was just under R100 000, the income of the median public servant was over R260 000. Only at the highest income levels do public servants earn less than the average taxpayer. Taxpayers in the 95th percentile earned about R682 000 compared with R563 000 earned by public servants in that percentile.”
Unplanned spending requirements
Treasury said that policy risks include unplanned spending requirements that cannot be accommodated within the expenditure ceiling.
“Budget execution risks emerge when departments or entities exceed their spending ceilings. At the aggregate level, budget execution has been good. Spending outcomes in 2016/17 remained within the expenditure ceiling.
“The main medium-term expenditure risks are the public-service wage bill and additional funding needs for higher education. Demands for additional financial support to state-owned companies, which are likely over the medium term, are discussed later in this chapter.
“Over the three-year spending period ahead, the contingency reserve amounts to R16 billion, which is considerably smaller than it has been in previous budgeting cycles. This diminishes government’s capacity to respond to spending risks.”
* Visit our Mini Budget Special Issue for all the news, views and analysis.
SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.
Read Fin24's top stories trending on Twitter: