"Serene calm on the surface, but furious paddling below.”
This is how Peter Attard Montalto, economist and strategist at the Japanese investment bank Nomura, described the National Treasury’s attempts to balance weak economic growth with tight fiscal and monetary policy instruments while fending off possible credit rate downgrades from rating agencies.
On Wednesday, 21 October, finance minister Nhlanhla Nene continued to hold the conservative stance he had taken during last year’s Medium-Term Budget Policy Statement (MTBPS) and the February Budget Speech.
“If you find this [speech] boring, it’s for a very good reason. We’re presenting this medium-term budget in a very challenging global sentiment and we must also be honest about our challenges we need to overcome,” Nene told a media briefing ahead of his second medium-term budget statement.
Large public wage bill
He singled out the higher-than-expected settlement on public wages – a 10.1% increase in salaries and benefits – as the biggest factor that is putting pressure on public finances.
This means that government’s aggregate spending will remain the same, while national, provincial and local governments need to be very frugal in their spending over the next three years.
“The shortfall in compensation budgets has significant consequences for the public finances. It’s absorbing resources that had been set aside for other priorities,” Nene said in his statement.
The above-inflation wage increase also means that no government posts can be filled in the next three years, as government had to dip into its contingency reserves to fund the shortfall.
The wage settlement crowds out other responsibilities, said Nene. “And an increase in headcounts was the first casualty – no vacancies will be filled.”
Nene issued a stern warning, though: “Without corresponding improvements in the quality of public services, increases of this kind are not sustainable over the long term.”
Christie Viljoen, economist at NKC African Economics, said there wasn’t much government could do to curb the wage increases. “Cutting personnel costs is simply not an option.
The ANC and Cosatu regard the public sector as the job creator through government’s extended public works programme and that’s not about to change.”
But is it sustainable?
This is an excerpt of an article originally published in the 29 October 2015 edition of finweek. Buy and download the magazine here.