Burning Fiscus | Is the public wage bill the war elephant that tramples Mboweni's hopes?

• Government last year vowed to reduce spending by about R300 billion over the next three years, with the largest cuts coming from the public sector wage bill.  
• Labour unions have rejected the cuts as they await National Treasury's answering affidavit in a Constitutional Court battle over the 2018 public wage deal.
• Economists believe getting to grips with the public service wage bill is as urgent as ever to slow a worrying increase in SA's debt-to-GDP ratio.

A year after Finance Minister Tito Mboweni launched his salvo against the ballooning public service wage bill, government is locked in a court battle with labour unions about the failure to honour the last year of a previous wage deal as the issue remains a central fiscal bugbear for National Treasury. 

Mboweni is set to table his 2021 Budget Speech in a hybrid joint sitting in the National Assembly on Wednesday - a year after he outlined proposals to cut state spending by about R300 billion over the next three years, chiefly from the payment of public service salaries.

The proposals were immediately rejected by organised labour in the public service, particularly those in the ANC-allied Congress of South African Trade Unions (Cosatu).

The unions were incensed that government had reneged on the final year of its 2018 agreement to pay CPI plus 1% wage increases, saying this was unaffordable. 

The issue become only more pressing for National Treasury after tax returns plunged in the wake of businesses shutdowns caused by the Covid-19 pandemic.

Tax receipts are expected to be between R200 and R250 billion lower than what was estimated a year ago before the pandemic struck. As a result SA's consolidated deficit is expected to widen from from 6.4% of GDP in 2019 to around 15% in 2020 - although tax experts now say this last figure may a touch high. 

The fall in tax revenues, coupled with rising debt and interest payments, put unpopular cost reductions in the spotlight.  

"Stabilising debt to avoid such a crisis will involve significant expenditure reductions across government," said National Treasury during the medium-term budget in October.

But unions are fighting the reductions, arguing the state is "outsourcing" the responsibility to fix the budget to workers. The root causes of the National Treasury's predicament, according to Cosatu, are corruption, badly managed state-owned enterprises (SOEs), a lack of economy growth and the "hollowing out" of the SA Revenue Service during the era of state capture.

At least two unions legally challenged the failure to honour the wage agreement and the matter is set to be heard by the Constitutional Court after the Labour Appeals Court dismissed an application for government to be compelled to honour the agreement.

State of play

As unions continue the fight for the last year of 2018's wage deal to be honoured in court (deals are struck for three-year periods), Mboweni is expected to provide some indication to South Africans and sovereign credit ratings agencies that government is serious about getting to grips with its debt and spending.

In the medium-term budget, the minister warned that SA was borrowing at a rate of R2.1 billion per day. "Madam Speaker, we must be careful to avoid the fate of countries like Argentina and Ecuador that defaulted on their debt this year," he said.

South Africa's annual debt-servicing costs have reached R225 billion, and for years have been the fastest growing item in the budget. On Wednesday, economists will be keeping a close eye on the latest figure Mboweni quotes. 

The public service wage negotiations between unions and the Department of Public Service and Administration, as the representative of employers in the public service, will come before the Constitutional Court, but National Treasury is also expected file an affidavit on the matter in the interest of of fiscus.

General secretary of the South African Democratic Teachers' Union, Mugwena Maluleke, said labour received the answering affidavit from the Department of Public Service and Administration and was waiting for the replying affidavit from the National Treasury.

"We will argue for why we are appealing, and then we will hear the substantive merits of the case. There is an opposing affidavit, which was expected. It is still a long way to go and we have to see Treasury's affidavit then our lawyers will be able to respond," said Maluleke.

Readying demands

Maluleke said the salaries of public servants were being paid since the beginning of the Covid-19 pandemic, but said the only thing that has not been received is the agreed increase.

"We are starting negotiations for 2021. We are in that process to make sure that the demands are ready. We will also wait for the outcome of the courts and if the employer seeks a discussion outside the courts, we are prepared to do that," Maluleke said.

Maluleke said government pleading poverty in the midst of a pandemic was "not completely sound" and the court challenge was now about preventing "a constitutional and labour rights nightmare" where labour would negotiate with the Department of Public Service and Administration only for National Treasury to unilaterally intervene.

"We were saying to the court that we need an equitable remedy. We ask that they not say that the matter is not urgent. We are saying that if that is unenforceable on the basis of the economic situation, we should have been sent back to chamber to negotiate a remedy," he said.

He said labour needed clarity on the supposition that National Treasury is a "super department" or government organ that sit above all other departments, so that unions know who they need to negotiate their wages with in future.

A year later, urgency remains

In the 2020 Budget Review, National Treasury proposed, "as a major step towards fiscal sustainability", a reduction in main budget expenditure baseline by R300 billion over the next three years compared with 2019 Budget projections. 

"This is approximately 1% of GDP per year. The net reduction is mainly the result reductions to baselines of R261 billion, which includes a R160.2 billion reduction to the wage bill of national and provincial departments, and national public entities," the review said.

The 2020 Budget Review said in 2019, developing-country risk premiums and bond yields continued to fall as these nations' currencies remained largely stable against the US dollar.

"Countries with high levels of debt and policy uncertainty, such as South Africa, faced considerably more volatility. On average in 2019, the rand's nominal exchange value fell 5.4% in trade-weighted terms and 1.9% in real terms," the review said.  

Taking the pain

Lullu Krugel, chief economist for PwC in South Africa, said during a webinar that cutting spending on the state's salary bill remained one of the things that the International Monetary Fund continues to ask from government, notwithstanding that it was a condition of a R70 billion loan from the group.

"That was one of the areas where we have to provide feedback as to what are we going to do to reduce both government salaries - and the other one was SOEs.

"There are ... two schools of thought and two things happening in my head. On the one hand, I'm thinking [the] private sector and everybody else is taking the pain at the moment, you know, salary freezes are a common occurrence," said Krugel.

Peter Montalto, head of capital markets research at Intellidex, wrote in a research note that the forthcoming Constitutional Court case brought by the unions was problematic on the grounds that it will be argued on process rather than constitutional rights.

"Overall, we think some compromise closer to zero real is more likely and that zero nominal for three years is politically unacceptable. This equates to around R143 billion over the Medium-term Expenditure Framework. The question then becomes whether National Treasury uses its powers (which were highlighted in public by the court case) to say no," said Montalto.

University of the Free State vice-chancellor for poverty, inequality and economic development, Philippe Burger, said if growth in the total salary bill is to remain below inflation, then the only way for salaries to grow at a rate equal to inflation, is for the number of civil servants to decrease.

"In the absence of a drop in the number of civil servants employed, a below-inflation increase in the salary bill will mean that salary increases will also be below inflation, which, in turn, means that in real terms salaries decrease," said Burger.

Burger said it was essential that government reduce the salary bill to the proposed 0.8% growth levels, otherwise there will be no possibility of arresting the growth in the debt/GDP ratio.

"The National Treasury is committed to this target, but in the end, it is a decision the government has to take. This is an election year, which introduces a number of additional pressures on the government, more so since they are in an alliance with Cosatu," Burger said.

Burger said the salary bill's size originated mainly in 2009 and 2010 when it grew substantially as a percentage of GDP from 9% in 2008/09 to 11% in 2010/11, "whereafter there was a continuous slow upward drift to almost 13% in 2019/20, almost 4 percentage points higher than in 2008/09".

Additional reporting by Jan Cronje.