Finance Minister: Public service wage bill risk to SA’s fiscal framework

Remuneration packages in state‐owned companies need to be better aligned with public‐service remuneration — National Treasury.
Finance Minister Enoch Godongwana. Image: Dwayne Senior/Bloomberg

Pressures from the public service wage bill are a risk to South Africa’s fiscal framework, said Finance Minister Enoch Godongwana in his Budget speech on Wednesday.

Continued requests for financial support from financially distressed state-owned companies was also listed as a risk.

“We remain committed to controlling those parts of the budget that are permanent in nature, including by arresting rapid increases in the public sector wage bill,” he said.

The Budget Review said National Treasury agrees that remuneration packages in state‐owned companies need to be better aligned with the public‐service remuneration framework and that an internal policy must be developed to govern the use of consultants by government entities.

Godongwana said compensation spending will increase marginally and at an average annual rate of 1.8% from R665.1 billion in 2021/2022 to R702 billion in 2024/2025.

“As indicated in the 2021 Medium-Term Budget Policy Statement, we have allocated additional funding of R20.5 billion in 2022/2023 to meet the cost implications of the 2021 public service wage agreement.

“A Public Sector Labour Summit is scheduled to take place as from March 31.

“This summit is an important opportunity for stakeholders to engage on building a sustainable public service and remuneration guidelines,” he said.

The Budget Review said compensation spending for national and provincial government grew by 7.3% on average for the period 2014/15 to 2019/20 compared with 6.8% average growth in non‐interest expenditure.

It said this trend crowded out other spending items like goods and services, with a concomitant impact on service delivery.

The review said the decision to not implement the final leg of the 2018 wage agreement and other measures to reduce average wage costs have improved the wage trajectory.

However, the review said a decision by the Constitutional Court to uphold the appeal related to non-implementation of the final leg of the 2018 wage agreement will constitute a risk to the fiscal framework.

It said the medium‐term wage bill growth is projected to be much lower than the original trend, which will contribute to closing the gap between revenue and expenditure, improving the composition of expenditure.

The review said a new round of collective bargaining will begin in March 2022 and the National Treasury is working with the Department of Public Service and Administration “to keep the compensation baseline within affordable limits”.

“As indicated in the 2020 Budget, compensation baselines will grow at the rate of inflation from 2024/25.

“Should collective bargaining result in salary adjustments that exceed compensation ceilings, reductions in headcount will be required,” it said.

The review said the 2021 wage agreement awarded employees a non‐pensionable cash gratuity and, in the absence of a new agreement, the same gratuity will be paid in 2022/23.

Provision for this is made in the 2022 Budget, it said.

The budget said to reduce the public‐service wage bill, the Department of Public Service and Administration is reviewing personnel expenditure to inform the development of a remuneration policy framework for the public sector.

The spending review for the Department of Public Enterprises is ongoing and the outcome will be communicated in due course, it said.

The review said compensation of employees accounts for the majority of provincial expenditure, adding that over the MTEF period about 62% of health budgets and 77% of education budgets will be spent on compensation.

It said the National Treasury in 2021 analysed trends in provincial compensation, with key findings from the analysis showing that:

  • Compensation accounts for about 55% of spending in the Western Cape and Gauteng and up to 69% in poorer, more rural provinces, with education and health accounting for about 85% of compensation spending.
  • In line with overall public‐service compensation trends, salary growth has accounted for 75% of the increase in compensation spending since 2006/07 while increased headcounts account for only 25%.
  • Growth in average provincial remuneration is determined through national government, with provinces having little control over remuneration levels.

In this context, it said that policies that define staffing norms need to be reviewed on the basis of affordability.

“There is a need to review the approaches provinces have taken to managing different employees – such as community health workers, early childhood development practitioners and Expanded Public Works Programme workers – to identify differences in practices, and the associated costs and benefits.”

In regard to the expenditure on consultants, the review said National Treasury in 2021/2022 reviewed the efficiency of its spending on consultants due to its growing proportion in relation to compensation spending.

It found that between 2016/17 and 2020/21 government spent an average of R808 million annually on consultancy services – 1.9% higher than spending on compensation of employees.

To achieve long term savings, the review recommended that the department develop an internal policy to govern the use of consultants and cap the hours of work supplied by consultants at 1 760 hours per financial year compared with the average of 1 920 hours over the review period.

An annexure in the Budget Review referred to the Select Committee on Appropriations on the Adjustments Appropriation Bill, which said National Treasury agrees that remuneration packages in state‐owned companies need to be better aligned with the public‐service remuneration framework.

“Nevertheless, this would require legislative changes for certain state‐owned companies, as remuneration in state‐owned companies is governed by their boards.

“Remuneration matters relating to public office bearers are governed by the Independent Commission for the Remuneration of Public Office‐Bearers.

“The National Treasury’s role is to advise on proposed recommendations, in light of the macroeconomic and fiscal position of the country,” it said.

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