Thought Leadership

Wage bill is perhaps the greatest challenge facing Ramaphosa’s administration

07/11/2019 | By Busiswe Mavuso

Busi Mavuso

THE sixth administration is going to have to face up to some hard truths over the next few months if it is going to show some real commitment to drawing a line in the continued deterioration of its finances. There’s no harder truth to face than its bloated wage bill.

When Finance Minister Tito Mboweni stands before the country to deliver his second budget speech in February, the only ratings agency that still has the country on an “investment” rating will be watching for decisions on cutting an expenditure item that only the administration has the tools to deal with. Moody’s Investor Services reduced South Africa’s outlook to negative and in effect gave the country between three and 12 months to demonstrate that it will turn the trend and stabilise the national balance sheet.

The February budget speech is key.

The agency’s move brought us just one step closer to complete “junk” status. While some in our body politic may dismiss this as being simply foreign market forces at work, a slide into junk status will make funding this state even more difficult for decades to come. As one notable economist recently said in a social media post, “…the sharp deterioration in SA government finances means that in three years’ time the government will have to spend more on interest payments than health care.”

Now that’s alarming and, one would hope, a sobering proposition for our political class.

Ironically, for policymakers both within the governing party and the more populist forces outside, it would make us more dependent on these very market forces if the state were to disregard the threat of a fall into complete junk status. Were we to slide into these waters, we’d be reliant on that old economic adage of “a rising tide lifts all boats” as we would depend on an improved global economy to improve our fiscal situation.

Anyone who has followed developments around the global trade war that on the surface has been hinged on a battle between the US and China for trade supremacy, would know that it is a much broader. With or without US president Donald Trump, it’s one that is likely to be a key feature of economic debates in years to come, continuing to place significant pressure on global growth. It would be folly to rely wholly on a change in the global economy for improvement to our economic prospects and in turn of fiscal position.

The state needs to drag itself out of its own trappings, which in the very short term means instituting a long-term funding solution for its state-owned enterprises and taking urgent steps to reign in its wage bill. There have been a great many column inches dedicated to our SOEs and there’ll be many more, but within these next few weeks, one feels the wage bill will be the litmus test for the state’s commitment to reform. In a climate of 30% unemployment and with the governing party’s alliance partner, Cosatu, having its greatest strength in public service, this will perhaps be the greatest challenge of this administration.

But it’s a hard truth that has to be faced.

The wage bill consumes 46% of tax revenue and wages have been among the three fastest growth areas of government expenditure. The others are debt service costs and SOE bailout packages to Eskom and SAA. Wages have grown at about 40% above inflation over the last decade. In the first half of this year, wage growth in the private sector was 2.1% but 10.4% in the public sector.

The blowout in the wage bill is one major indicator of a loss of restraint, alongside the dismal financial performance of our SOEs and government wasted expenditure from national to municipal levels, exacerbated by corruption.

The battle lines between the state and unions will at its core be between the microeconomy, which is concerned with single effects of individual decisions, and macroeconomic lever effects of stimulating the economy. Unions are likely to want more spending by the state and for the Reserve Bank to lower interest rates to boost the economy in exchange for any give on lowering the wage bill.

It’s not a good point to start off any conversation as you quite simply can’t agree to lowering the wage bill while also agreeing to lower interest rates – because the central bank is independent. And further spending would just negate any savings made in the reduction of the wage bill.

We are set for a clear standoff between labour and National Treasury and its minister, who is already unpopular within Cosatu. Treasury sees the wage bill as an essential part of rescuing its finances while the union federation doesn’t want to see employees bearing the brunt of past excesses.

Dealing with public sector wages is certainly set to be a delicate political negotiation process.

In 2020/21, another public sector wage negotiation round will begin which will set the tone for another three years. Stimulating economic growth and reducing the overall wage bill is urgent if the country is to avoid a downgrade. It is critical that growth is stimulated in the wider economy to drive higher revenue collection and improve the employment absorption capacity of the private sector relative to the public sector. Effectively, employees need to be rotated out of the public sector and into the private sector.

We implore labour to come to the table as a key social partner to help resolve this crisis and it should be made clear that the public sector wage bill can be reduced by reducing wage levels, rather than cutting jobs. Overall the wage bill issue isn’t really hard to solve if there is simply restraint for a few years in hiring.