Government has put the brakes on the public service wage bill. After a zero increase last year, it is only projected to increase by 1.2% annually in the next three years.
In this endeavour, National Treasury budget documents released on Wednesday show government to be buoyed by the Labour Appeals Court judgment handed down in December last year, which essentially found that the three-year rolling wage and salary agreement at issue was not legally binding (because Treasury’s permission had not been obtained), and that Treasury’s responsibility to ensure the nation’s fiscal and financial well-being trumped its commitment to honour the wage agreement.
Trade unions have appealed the judgment, with papers filed before the Constitutional Court and a verdict expected within the next few weeks.
The updated fiscal framework reduces growth in the wage bill and the share of spending on wages, while sustaining real spending increases on capital payments, specifically for buildings and other fixed structures.
Public service compensation absorbed 41% of government revenues in 2019/20 and 47% of revenue in 2020/21.
Allowing the wage bill to continue rising in line with recent trends is not sustainable, Treasury states, as it would require a substantial reduction in funding for capital investment, and in funding for critical public goods and services.
In following its interpretation of the court’s verdict, Treasury’s approach to future wage negotiations will align with the fiscal position and prevailing economic conditions. This year’s budget therefore proposes a significant moderation in spending on the consolidated wage bill, with an average annual growth of 1.2% over the next three years.
Treasury states that the sustainability of the public finances bill will depend heavily on government’s ability to reduce growth in the public service wage bill.
Public service wages accounted for about 34% of consolidated state spending by 2019/20. In the 13 years leading up to that point, public service compensation was one of the fastest-growing spending items – faster than GDP growth.
It had become unaffordable and had become the main expenditure risk to the sustainability of public finances. At the general government level (including municipalities), South Africa’s wage bill as a share of output is approximately 5 percentage points higher than the Organisation for Economic Co-operation and Development (OECD) average. In fact, South Africa finds itself on a par with the Nordic social welfare economies of Denmark and Iceland.
Last year’s budget proposed compensation reductions totalling R160.2 billion over three years, which last year’s MTBPS stepped up to R143.2 billion over two years.
Cuts Treasury is contemplating include doing away with annual cost of living adjustments in the public service for the next three years, together with measures to reduce posts and hence headcounts through a combination of early retirement, natural attrition and the freezing or abolition of non-critical posts.
In addition, government is exploring measures such as harmonising allowances and benefits, reconsidering pay progression rules and reviewing occupation-specific dispensations.
Performance bonuses are already being phased out and careful consideration is being applied to amending or abolishing some allowances and benefits.
Wage negotiations will continue in the Public Service Co-ordinating Bargaining Council. Government will negotiate on the basis of fairness, equity and affordability.
Treasury furthermore points out that an agreement which exceeds budgeted amounts would present a risk to the fiscal framework. Examples cited include that a three-year inflation linked agreement would raise the total shortfall to R112.9 billion by 2023/24. And an agreement similar to the one agreed to in 2018 – 1 percentage point higher than inflation – would create a compensation shortfall of R132.7 billion (or 2.2% of GDP) within two years from now.