Finance Minister Tito Mboweni’s 2020 budget speech was built on a simple premise: South Africa can no longer expect to tax itself out of its fiscal problems.
“There was a realisation that we’ve increased tax rates for the last five years, and for various reasons we haven’t had as much success in raising the amount of revenue we wanted,” Warren Harris, an economist at National Treasury, explained after the minister’s presentation.
“So we couldn’t credibly put forward proposals for large tax increases again.”
Instead, the only option available to government is to cut its expenditure. And the minister’s main focus in this regard was on reducing the amount of money paid to state employees.
Mboweni announced that government intends to reduce its expenditure on wages by R160.2 billion over the next three years. That will start with a R37.8 billion cut for 2020/2021.
“This wage bill reduction is about changing the composition of spending,” Harris explained.
“The alternative would have been a 2% or 2.5% increase in the Vat rate to make up that same R160 billion.
“We felt that this was, for several reasons, the better option.”
It needs to work
The wage bill has been a point of contention for some time. As a percentage of government spending, it is one of the highest in the world.
The news that it will be meaningfully addressed was therefore widely welcomed.
“This is one of the best budgets I’ve heard, if the reductions to the wage bill are delivered,” said Wayne McCurrie, senior portfolio manager at FNB Wealth and Investment.
“It’s the first time in 20 years that there has been an effort to constrain government consumption expenditure.”
That optimism is however conditioned on that significant ‘if’. Even before the budget was presented the Public Servants Association voiced its disapproval of the government’s desire to renegotiate wages.
Immediately after the budget, a Cosatu spokesperson also noted that they found the proposal problematic.
“Cosatu seems to be saying something completely different to Tito Mboweni,” pointed out Zolani Buba from Inolaz Advisory. “That could be a potential spanner in the works.”
For McCurrie, it is critical that Mboweni is successful.
“The crux to this budget is the negotiations with unions and getting the wage level down,” said McCurrie. “You can only hope that there is some sort of backroom agreement in whatever form already in place that enabled the finance minister, with the support of the president, to make that announcement.”
Harris made it clear that the finance minister is not on a lone crusade.
“Cabinet is definitely behind the finance minister’s proposal,” he said. “There is some genuine commitment to make progress on the wage issue.”
This support has to hold for this budget to work.
“If the government can’t deliver on this wage freeze, all of the projections – and their credibility – will just disappear,” McCurrie pointed out. “Everything is predicated on controlling this wage bill.”
It is not just a question of its importance to sorting out the government’s current fiscal position either. Addressing the expenditure on public sector wages has much bigger implications for the country as well.
“The focus on the wage bill is for us a big step in the right direction, not just for the immediate fiscal position, but for medium to long term growth,” Harris explained.
“There is a focus on changing the composition of spending – away from wages to freeing up additional money for capital budgets. From a medium to long term perspective, that is an important step for us to support growth.”