A welcome step on public sector wages, but action is still needed on SOE vampires

03/03/2020 | By Admin

What was called for in this week’s budget speech was substance, rather than bluster about how we must do something about the crisis in expenditure and rising debt. For the most part, finance minister Tito Mboweni delivered.

To steal a quote from an economist, it was “a fascinating budget” as the minister threw the kitchen sink at the unions with his plans to reduce the public-sector wage bill – for about 1.2-million staff in national and provincial governments – by more than R160bn.

Cognisant of the health of the economy, Mboweni is not planning massive job cuts, which would immediately lighten the expenditure load. Rather, he has chosen to review the rate of wage increases.

On Tuesday we’ll get our GDP figures for the fourth quarter of last year and all indicators suggest we will be lucky to escape the technical definition of a recession.

What is certain is that, for yet another year, our economy will have dipped below the 1% growth mark. We’ve had an underperforming economy perhaps since as far back as 2013. More recently this has been evidenced by the poor corporate earnings season.

For the best part of a decade, workers in the private sector have borne the brunt of our economic struggle as mining companies, for example, have slashed jobs in the face of sluggish commodity prices and rising costs, such as electricity.

Workers in the public sector, backed by their powerful unions, have been largely cushioned from its full effects.

Private-sector earnings growth has been lower than inflation over the past five years and 8% lower than wage growth in the public sector. A common critique has been that the state has been on a hiring binge for the past decade but, as Mboweni pointed out, the years of hiring were only between 2007 and 2012.

In that period, some 190,000 people were hired and, ever since, the number of state employees has been declining.

It’s never really been about the number of employees; it’s fundamentally been about the rate of pay rises in the public sector and, of course, about the questionable quality of work.

But this was never a sustainable path and we are certainly at a point where the state has to deal with the now-massive elephant in the room. The Treasury and the various departments should expect some tough negotiating ahead with union movements, including the ANC’s alliance partner, Cosatu. It has already declared “war”.

The move to rein in wages will inevitably come with political costs – that’s par for the course. In any functioning democracy like ours, awash as it is with political contests almost every other year and the factional battles that are the hallmark of the ANC, there was an expectation that there would be no real movement on the wage bill. We were pleasantly surprised to see that there was.

The most recent three-year public-sector wage settlement expires only in April 2021, and the last wage agreement in 2018 was significantly higher than budgeted. The state’s request to renegotiate this settlement would mark the first time that an existing wage agreement has been reopened.

After the medium-term budget in October last year, ratings agencies were sceptical that there would be a plan on the table to reduce spending by R160bn, let alone R261bn overall.

There is still some scepticism that the government can achieve the salary targets, but this step could buy us a stay of execution from Moody’s, which might make the final call that would push our sovereign ratings into full “junk” status at the end of this month.

Judging by how well the budget was received, with the rand appreciating in a global market concerned at the effects of the coronavirus, we may just dodge that bullet again.

It certainly won’t be easy, though, judging by the response of Fitch Ratings, which already rates our debt as junk. Fitch said measures to consolidate the budget rely heavily on hoped-for moderation in public-sector wages, “which might not materialise, adding further risks to SA’s deficit and debt trajectories”.

So yes, while we have been pleasantly surprised by the measures taken by the Treasury, there’s much work ahead.

Some detractors have called this an austerity budget; it isn’t. The Treasury, aware of the deteriorating health of the economy, did not seek to boost government revenues through higher taxes on individuals and companies. There was some talk of a VAT increase, which would have been the second in two years.

Instead, the minister mooted the possibility of reducing corporate income tax to bring us more in line with international norms. Such a move would make us a more attractive destination for foreign direct investment.

There’s a measure of comfort in the budget speech, but we still face the twin factors of persistently low GDP growth and the continuing saga around the funding crisis of state-owned enterprises (SOEs), particularly Eskom and SAA.

Over the next three years our SOEs will continue to be a weight on the state, to the tune of R129bn – money that could be better used stimulating the economy. Over the past decade we’ve supported them with about R162bn.

To steer this country off the fiscal cliff that we’ve remained so close to for the better part of the past decade, our life-support measures for these institutions must be phased out. Proper governance must be allowed to take root once again and a measure of financial stability must be achieved.

In trying to correct the mistakes of the past, we know the state as shareholder has sought to keep a close watch on the day-to-day running of these operations.

Its good intentions have on occasion served only to slow the progress in getting these businesses running, as the finance minister has pleaded, “as businesses”.

The sooner that comes to pass, the sooner the clouds will lift on the South African economy.

Mavuso is CEO of Business Leadership SA