The government of South Africa is set to spend R2 trillion during the 2020/21 financial year, with R675 billion or just over 35% of the budgeted amount earmarked for salaries.
This means that out of each rand spent by government, 35 cents goes to its employees: teachers, nurses, police and the administrators.
Government employs 1.3 million people (excluding local government), representing 12% of total non-agriculture formal sector employment.
The amount spent by government on its employees is becoming an increasingly vexing challenge for the finance authorities and a downside fiscal risk expected to deepen the ongoing national debt problem and slow down the rate of economic recovery.
In his recent Medium-Term Budget Policy Statement, Finance Minister Tito Mboweni noted that the government wage bill has increased threefold over a 14-year period – from R154 billion in 2005 to R675 billion in 2020.
In the same period the headcount increased by 170 000, from just over 1.1 million employees to 1.3 million.
‘Occupational Specific Dispensation’ pay boost
Underlying the purportedly exponential growth in the salary bill are the so-called above-inflation wage increases secured by the trade unions over the years as well as a staff attraction and retention strategy called the Occupational Specific Dispensation (OSD) agreed to in 2007.
The salaries of lower occupations and middle management have been increasing at a nominal average rate of 8% (2% when inflation is factored in) per annum, while OSD has effectively widened the salary bands in order to improve public sector competitiveness.
For instance, OSD increased the starting salary package of a teacher with a four-year degree from R79 000 at the time to R90 000.
Speciality professional nurses benefitted the most with their starting salaries doubling from R80 000 to R160 000.
The OSD package was accompanied by a range of other improved perks, including a slightly higher housing allowance and medical aid contribution as well as a performance-linked accelerated pay progression.
Overly generous, or not?
It would seem from these developments that government has been overly generous in awarding wage increases or imprudent in keeping the wage bill in check.
However, there is more to the compensation cost than meets the eye. As much as R675 billion seems too high a figure to be remitted into the pockets of state employees whose productivity and commitment levels are a subject of ongoing concern, the wage bill remains fairly within tolerable levels or at least consistent with historical precedence.
Compensation of employees as a proportion of total consolidated spending decreased from 33% in 2004 to 31% in 2011 and started increasing again around 2013/14, levelling off at the current 35%.
The swings are broadly explained by the GDP growth factor – stronger growth years between 2004 and 2007 gave false signals of a declining wage bill because GDP was rising faster than compensation expenditure.
When the economy eventually took a knock from the 2008 financial crisis, salaries maintained their above-inflation growth rate, while GDP growth stagnated at an annual average of 1%.
This created an illusion of runaway personnel costs.
Yet in the education sector, the share of salaries relative to total education spending has remained largely flat at 70% since 2004. The share in the health sector and police increased by 8% and 10% respectively to reach 64% and 80% in same period. Higher personnel costs in these sectors are unsurprising because they are traditionally labour-intensive.
Wage bill seen as a key indicator by the markets
There is no denying that a rising wage bill is cause for concern.
Salaries tends to crowd out other important public expenditure needs essential for growth and overall socioeconomic development. More importantly, wage increases can widen the budget deficit if not accompanied by tax revenue growth. It is for this reason that both domestic and foreign financial markets take a keen interest in the size of the wage bill as a key indicator of a country’s fiscal health.
While there is no consensus on what the optimal size of the wage bill should be, cross-country comparisons do provide a reference point. On average, personnel spending absorbs nearly 20% of total spending in developed countries and 30% in emerging economies. With South Africa sitting at 35%, the agitation of the authorities is arguably justified.
International comparisons can however be misleading if not accompanied by a context-specific analysis of the push and pull factors underlying the wage bill and its composition.
The government of South Africa inherited a unique staffing problem that lingers to this day because of its historical past. It has received a combination of an overstaffed educational complement, following years of over-investment in teacher training by the Bantustan government, and critical staff shortages in health and the police, especially in rural areas.
Post-apartheid reforms necessitated that government rationalise salaries, introduce new staffing norms, and adapt international staffing standards recommended by various world bodies.
A pupil-teacher ratio of 1:30 has been achieved, but reaching the World Health Organisation recommendation of one doctor for every 1 000 people remains elusive.
Ironically, doctors represent more than 50% of government employees purported to be overpaid – earning more than R1 million per annum. Yet disturbing stories of overworked professionals exiting public healthcare are common. Unfortunately their efforts are often eclipsed by the prevalent incidences of medical negligence and poor quality care.
This conundrum – a coexisting high wage bill and undesirable service levels or staff shortages – challenges the simplistic framing of public salary spending as being bloated.
Further, the recent revelations of income inequality from the World Inequality Database (10% of the population earn 65% of the income in South Africa) are likely to place the wage bill under pressure as trade unions agitate for better income redistribution.
The wage bill may not be an appropriate instrument to achieve redistribution, but government may find itself on the back foot if it approaches the negotiating table without bold proposals for greater wealth taxes. Studies do indicate that workers’ share of national income has been shrinking while profits are rising. This complexity again shows that the discourse on public sector salary spending needs much more nuanced reflection rather than popular labels. Without these nuances, the solutions to the problem will be feeble.
The proposals currently on the table – to cut or freeze salaries, and offer early retirement incentives – are all commendable, but will serve only to reinforce inequality and unemployment, while reducing public service levels even further and thereby undermining the legitimacy of government.
The solutions for South Africa lie not so much in cutting the wage bill, but instead in investing in better state human resources management capabilities.
In other words, putting the right people into the right positions at the right grades, shifting more personnel to frontline positions, exercising diligent performance management, and re-emphasising labour productivity. A higher wage bill may be justified if public sector productivity grows faster than wage increases and induces overall economic growth.
Eddie Rakabe is an independent researcher and economist.