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Cutting the public wage bill won’t fly

Manage it better.

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.

Read: South Africa’s showdown with unions gets ugly

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.

Read: Public servants call for urgent talks on wage cuts

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.

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COMMENTS   18

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Just cut the wage bill man.

Where will SA get the “right” people to put in the “right” positions at the “right” grades???

Simple. We DON’T HAVE THE RIGHT PEOPLE!

Its funny how these articles like this try to provide red herrings to confuse the masses (think East German newspapers a few months before the fall of the Berlin Wall – “USSR stronger than ever!”).

My point is: the wage bill is over inflated because 4 people do the job of 2. The wages are also vastly superior to what these should be in a competitive market given the skill levels of said individuals. This, combined with an attitude of arrogance, entitlement and laziness compound the problem. This will continue until taxpayer money runs out and pension expropriation funds have dried up.

Think I am talking nonsense? Have you been to a public services office lately like Home affairs or traffic department…..

You cant retrench your voters.

“You can’t retrench your voters” – no matter what their skill level or battle experience.

This completely explains the stagnation in economic reform.
Brilliant.

It’s not just that public servants are OVERPAID, they also produce very little by way of return.
Productivity is at an all time low, as is competence.
All in all the tax payer is being shortchanged – no pun intended.

So essentially the unions have won hands down with the regime complicit.

Don’t look at the salaries of teachers and nurses etc. Look at the inflated government departments. There are too many officials that are not needed. They were employed just to give people jobs.

The concepts in your last paragraph Eddie are totally foreign to the ANC.
This makes no sense to them. Surely the right thing to do is make sure your family and friends have jobs and get to earn a salary. If they not not qualified or competent to do the job so what? At least they have the money and that is what is important.

Cutting the wage bill/jobs is not the short( or long ) term solution…it will create a socio economic disaster, not only for the employees but also for small businesses whom is dependent on these peoples buying power. Economic growth is the ONLY solution!

Your productivity wont increase today it will increase in 20-30 years time. Thats because a teacher educating a student only bears rewards in twenty years time and a doctor treating an elderly person never ever increases productivity because the next step of the client is the grave not the workplace.

You have a demographic problem, China solved it via a one child policy.

Come on my country think!

This is in part due to the productivity of Doctors saving children from Aids deaths…..hello lights switching on in your head

A higher wage bill can never be justified. The ANC use the wage bill as a voter base slush fund.

Don’t worry, South Africans are used to paying a premium for mediocrity.

If all these people did their jobs properly we would be OK. Thing is, dealing with government and local government is like a Fawlty Towers movie.

The capable ones at least warn you that this thing will probably take months. The others simply don’t respond at all. Forget phoning

Are you for real?? What about all the dead wood political appointments who contribute absolutely nothing to public service?

The ANC is an employment agency and uses tax money to buy votes. If every ‘civil servant’ did even half of what they are supposed too, SA would could a major step forward. If the government ’employees’ worked on a target driven basis, things would get interesting very quickly. The ANC is also in bed with the unions – case in point – caving to the unions on SAA. The unions ensure that their members get decent increases and then lock said increases in for years. The rest of us in the private sector, work ourselves into a coma each year and then get really bad [below inflation] increases. Pay those that work, manage those that don’t.

The article is the real Curate’s Egg; good in parts. There is no attempt to analyse the salary range – where is the money going? My bet is that the “government” (ANC cadre deployees) is hopelessly over staffed (add lazy, incompetent and corrupt) at the higher pay grades and under staffed at the lower pay grades.

To harp back on the old “apartheid” and “Bantustan” excuses is really just childish 25 years on. Do Germany or Japan still whine “but the war”? Grow up. SA is a corrupt Trump hole thanks to the ANC. Until they are changed, nothing will change.

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