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Unresolved public sector wage bill clouds MTBPS but detail needed on other spending cuts

26 October 2020 Nazmeera Moola, Head of SA Investments, and Sisamkele Kobus, Analyst, Ninety One

Starting in the February 2020 Budget and continuing in the June Supplementary Budget, the government has committed to significant expenditure consolidation. Unfortunately, with only a few days to go before minister Tito Mboweni tables the Medium-Term Budget Policy Statement (MTBPS), the question of public sector wages still remains unresolved.

Cumulatively, the National Treasury has budgeted to spend R390bn less than they had previously projected over the next three years.  In February, they budgeted for a cumulative R160bn worth of expenditure cuts.  This was increased by a further R230bn in the June budget as the National Treasury tried to provide a consolidation path in the face of a R300bn shortfall in this year’s revenue collections.   

The initial R160bn reduction was from wage cuts.  This was already quite ambitious.  Of this R160bn, R37bn was budgeted to be reduced in the current fiscal year, which required the government to renege on their existing three-year wage agreement.  

Perhaps it would be useful to go over what this wage agreement entails and the fiscal circumstances under which it was entered. The wage agreement was a result of about nine months of negotiations, from October 2017 until June 2018, and was back-dated from April 2018. For the fiscal year 2018/19 government employees received a wage adjustment ranging from CPI + 0.5% - CPI + 1.5%. The CPI number used of 5.5% was circa 1% higher than the average CPI of the previous fiscal year and the first two months of the 2018/19 fiscal year. In addition to the salary adjustment, the agreement included pay progression of 1.5% for all employees per annum, and other benefits which include a monthly R1 200 (inflation-adjusted every year) housing allowance.

 

Levels

2018/19

2019/20

2020/21

CPI

5.5%

 

 

Salary Levels 1-7

CPI + 1.5%

CPI + 1%

CPI + 1%

Salary Levels 8-10

CPI + 1%

CPI + 0.5%

CPI + 0.5%

Salary Levels 11-12

CPI + 0.5%

CPI

CPI

 

Even at that point, this wage agreement was unaffordable.  Only a few months earlier, in the February 2018 budget, the government had committed to containing the public sector wage bill.  At that time, it was pointed out that the level and rate of growth of compensation was a large concern, as it was crowding out spending on capital expenditure. In the fiscal year ending 31 March 2018, current expenditure was 60.5% of total consolidated government spending, with three-fifths of that being compensation.  The growing share of wages in government spending started eroding the infrastructure budget in 2012.  By 2018, wages were eating into the budget for non-wage consumables.  Provincial health departments were struggling to pay suppliers in the final months of the fiscal year.  This toxic spending mix meant the government had limited ability to improve the economy’s anaemic long-term economic growth. 

In response to the government’s refusal to implement agreed wage increases this year, the unions have taken the matter to court. While progress on the case is expected in November, a final resolution is likely to take several more months – and could drag on beyond the February 2021 budget.  

While the MTBPS will not be able to provide clarity on the wage bill, it should provide more detail on the additional R230bn worth of expenditure cuts planned under the active path.  If fiscal slippage on expenditure cannot be avoided, then believable commitments on controlling expenditure are needed.   Any allocation of funds to SAA should be accompanied by the announcement of a competent partner who will take over control of the airline. This will promote confidence from investors and businesses. 

Investors, particularly bond fund managers, will also be hoping for a reduction in current weekly bond issuance. As issuance is currently running somewhat ahead of requirements for the current year, National Treasury should take the opportunity to reduce the weekly auction size.  Reducing issuance would send a very positive message to the bond markets – and encourage more local and international fund manager take-up.  It would indicate a commitment by National Treasury to stick to the MTBPS – rather than retaining optionality for future issuance increases.  Reducing issuance at this juncture will lead to lower bond yields, thus reducing borrowing costs.  

In the recent economic recovery plan, the president announced “Operation Vulindlela”, whose purpose is to ensure rapid implementation of the initiatives announced in the plan. This would be a joint initiative between the National Treasury and the Presidency. If Operation Vulindlela publishes a roadmap and key performance indicators and holds officials accountable against that roadmap, this would be positive. To encourage confidence, the MTBPS should provide more detail around how Vulindlela will operate and who will lead it. 

In this MTBPS, the National Treasury cannot guarantee a significant part of the fiscal consolidation, which is the curtailment of wage increases.  Markets know not to expect this.  However, much more detail is needed on the plans to curtail non-wage expenditure over the next three years. Markets want reassurance that something closer to the active path the Supplementary Budget outlined is achievable.   If the Finance Minister simply provides a trading update, that will put upward pressure on bond yields and therefore increase the borrowing costs.

 

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