R439?billion: Pravin’s high cost of wages

2014-03-02 10:00

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Worrying déjà vu sets in as national debt spikes towards 1990s levels

The state’s wage bill and its debt repayments loomed large in this week’s Budget Review. More than half of the R1.2?trillion budget is spent on salaries for government employees (R439.4?billion) and debt repayments (R114.9?billion).

There is also some concern that increases stated in the budget are not realistic. Government’s next round of wage talks will kick off later this year to determine increases from next year, but the budget seems to be setting highly unlikely ceilings for the wage bill going forward.

This year’s budget allows for a 6.8% jump in compensation to R439?billion, amounting to 35.2% of all government expenditure.

That is despite the standing wage deal guaranteeing an increase of inflation plus 1% – which according to Treasury’s forecast comes down to 7.2% this year.

In an interview with City Press, Finance Minister Pravin Gordhan said one can’t be that specific. According to him, “these are all estimates as we go forward”, and the new administration put in place after the election “will lay the basis for negotiations between state and labour in the new term of office”.

The overall wage bill can also be kept in check by reversing the trend in recent years where government “had a lot of admin staff coming on as opposed to front-line workers”, says Gordhan.

Because Treasury has exhausted every inch of fiscal space with its post-2012 policy of expenditure ceilings, there is very little room to manoeuvre.

In the Budget Review, Treasury says it is already working with the department of public service and administration on preparing to negotiate a “fair and sustainable” wage deal this year.

The budget’s forecasts for improving the deficit and borrowing less are also premised on the private sector picking up the slack on the employment front.

The state and its companies collectively represent the country’s major employer and capital investor, especially since the economic crisis.

Between the onset of the crisis in 2008 and 2012, the national and provincial government hired 190?000 people while the rest of the economy shed jobs.

Government’s stated intention is to place a ceiling on its employment, except in cases where there is a “compelling explanation”, already threatens the recent recovery in employment numbers.

A serious improvement in economic conditions, unusually temperate wage deals and serious delivery from Eskom are needed if Gordhan’s latest budget is going to materialise.

Much of this year’s Budget Review, and speech, lingered on the vast improvements in public finances and economic conditions since 1994.

But at the same time, there is a worrying sense of déjà vu.

National debt is heading towards levels that prompted the painful consolidation period of the late 1990s presided over by Trevor Manuel in his first term as finance minister.

That was the era of the Gear macroeconomic policy and state expenditure drops as percentages of GDP until 2000 to close the deficit inherited from a broken apartheid state.

Like Manuel, Gordhan is fresh out of fiscal space and plans to reduce government spending as a share of GDP.

In the 2014/15 budget, national gross debt is projected to reach R2.2?trillion by 2016, totalling 48.3% of GDP, which is close to the high point of 49.5% reached in 1995.

The budgeting that will narrow the deficit and bring down borrowing depends to a large extent on the predictions Treasury is making for economic growth and inflation, which economists view as too rosy.

After last year’s 1.9%, Treasury now hopes for economic growth of 2.7% this year, 3.3% next year and 3.5% in 2016.

A Reuters poll of economists last month put the consensus prediction at 2.5% this year and 3% next year, with some expecting a great deal less from the South African economy.

Apart from unpredictable global growth and wage increases, a key risk to local growth is Eskom again delaying going live with its Medupi Power Station, meaning businesses would be unable to build new power-hungry operations.

But the fastest growing element of the budget over which Treasury has limited control is the debt service bill.

The amount spent on interest and other debt-related costs will surpass the spending on social grants by 2016, according to the budget.

Social grants will by then total R137.6?billion while debt service will be R139.2?billion, or 10.5% of state spending.

The rest of the public sector

The state debt is one thing. The public debt, including state-owned enterprises (SOEs) and municipalities, is something completely different.

SOEs contribute the lion’s share of the elevated levels of capital expenditure Gordhan was able to boast about this week when comparing his budget with those of the 1990s.

Eskom and Transnet are debt financing the infrastructure that is supposed to underpin any big economic recovery in South Africa.

The public debt, including SOEs and local government, was sitting at 57.3% of GDP in 2012 and is growing at a higher rate than state debt alone.

By 2016, this will probably easily outstrip the 1994 level of about 70%.

Treasury does not forecast this debt measure but unlike the national government, SOEs will be ramping up their lending next year before starting to taper it off in 2016.

Next year, SOEs will borrow about R91?billion while government will separately borrow R174?billion, according to budget predictions.

Treasury clearly wants more say in this department and is planning amendments to the Treasury Regulations, which determine the ability of SOEs to borrow money and achieve “strengthened oversight”, according to the Budget Review. The SOEs will then have to submit quarterly capital spending reports, it says.

SOEs that can borrow will also need to conclude a “shareholder compact” with the ministers who oversee them in consultation with Treasury.

Treasury also wants SOEs to get out of the domestic bond market, were government gets most of its financing, and seek finance from multilateral development financiers “to reduce borrowing costs and ease pressure on the domestic market”.

– Additional reporting by Carien Du Plessis

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