The highlight of the South African financial calendar in October was the medium-term budget speech (MTBS). The eyes of the world fell on newly appointed minister of finance Tito Mboweni as he detailed the mid-year state of the South African budget.
The economic stimulus package and the current state of affairs with regards to revenue collection and government expenditure were the most keenly anticipated topics. Mboweni stated that decisive action would support more rapid economic growth and sustainable public finances. This statement sounds simple enough, however, South Africa faces a vast challenge in stabilising public finances given the current weak financial state of a number of state-owned enterprises (SOEs).
Mboweni made two distinct statements that will impact the SOE labour force, albeit with different consequences:
- Without restructuring, there is a significant risk that the weak financial condition of SOEs will put major pressure on public finances.
- The main driver of increased spending is large increases in wages and other employee benefits, rather than increases in employment.
Restructuring an organisation, particularly in an effort to cut costs through increased efficiency, often results in redundant employees being retrenched. Adopting policies to limit the increases of wages and benefits within SOEs would almost certainly result in industrial action as a large percentage of employees within these enterprises are unionised and have traditionally resorted to industrial action over wages. Regardless of these concerns, this is a daunting but necessary task as the cost of servicing SA’s debt is becoming unsustainable. It will reach approximately 18% of all government expenditure by 2026 if SA does not improve its economic growth outlook.
Table 1 details a few key economic indicators that should be taken into account when making such a decision.
According to the South African Reserve Bank (Sarb), compensation of employees has consistently increased at a rate above inflation. Over the same period, unemployment has been on the rise, which provides even more evidence to the MTBS stating that: “The main driver of increased spending is large increases in wages and other employee benefits, rather than increases in employment.”
One reason offered for the increased expenditure on wages and benefits: wages at the lowest ranks of public service were increased in an effort to reduce the wage gap. But let us compare public sector pay to private sector pay. Figure 2 illustrates SA private sector general staff pay by grade compared to that of SOEs.
The graph shows that SOE pay exceeds private sector pay across all levels of general staff. The reason provided for accelerating the increases of the wages and benefits of the lower level employees within SOEs may seem like a noble ideal, but there needs to be a link between pay and productivity. If pay is simply raised without increased production, the unit labour cost of staff increases, which ultimately drives up the wage bill relative to production. Within most organisations, salaries and wages form the largest expenditure line item, and the same is true within government and SOEs.
The question of whether to restructure the organisations’ design or rein in the rate of increases is a controversial topic given the state of the economy and the plight of lower level employees. Employment is critical to the economy and the current unemployment rate of 27.2% (Q2 2018) is unsustainable if South Africa is to become a more equitable society. Conversely, tackling the issue of inflation-plus increase expectations is a monumental task given the rampant industrialised action over wages in this country. The answer will most likely sit somewhere in the middle as every effort needs to be made to preserve employment – although there is a need to restructure organisations to improve efficiency and productivity.
A model of redistribution of employees (to improve productivity) rather than termination of employment, together with more realistic increase demands (within the context of state finances) would alleviate both concerns. This process would require all stakeholders to come together and work as one to find the optimum economic path for both labour and government. It would require all parties to focus on the long term economic path of the country rather than their individual interests and portfolios.
Regardless of the path chosen, there will need to be concessions between stakeholders if South Africa is to avoid uncontrollable debt given the current economic path. Debt is not an ‘evil’ in and of itself if it is used for tangible development and the building of infrastructure. But debt used to service expenditure items is the start of a debt trap as the entity using debt in such a way will progressively spend more of their already strained finances to service the ever-growing debt.
The transparency with which the MTBS was presented was refreshing and painted a somewhat grim picture of the current state of the economy. This transparency was very necessary to acknowledge the elephant in the room: growing debt and unemployment. South Africans now know the potential consequences of our current path and need to work together towards reining in the rampant state wage bill.
Bryden Morton is executive director and Chris Blair CEO at 21st Century.