Ferial Haffajee: Mini budget - If you’re middle-class, duck!

Right now, the fastest way into the middle class is to become a civil servant, and the fastest way out is through the private sector.

The medium-term budget policy statement released by Finance Minister Tito Mboweni on Wednesday is bad news for the working middle class in the private sector.

With growth forecasts cut to 0.7% from 1.5%, the ripple effects into the broader economy are clear. Retrenchments across sectors are high and unemployment projections are higher than expected.

While Wednesday’s budget statement makes it clear that big tax hikes are out of the question, as is another VAT rate hike, the revenue shortfall is expected to be R24.7bn in 2019/20, and then R33bn in 2020/21.

For the middle class in the private sector, salaries are either frozen or at percentage increases that barely match inflation. Various indicators suggest this is exerting a downward pressure or downward mobility on a fragile black middle-class.

The cash-strapped Treasury has, however, added a caveat that could pave the way for further hikes.

Personal income to absorb increases

If the February budget is any indicator, then personal income taxes will absorb an increase over corporate taxes. President Cyril Ramaphosa’s stimulus plan requires business confidence and a private sector with open wallets. Whacking it with tax increases will not secure the stimulatory effects his growth plan requires.

The rich strata of society structure income for maximum tax relief and while the system remains largely progressive, the fiscal policy pattern of steadily reducing the tax load on the middle-class has started to reverse.

The additional stealth taxes, like the fuel levy, as well as administered prices, will take a toll on middle-class homes too. Electricity tariffs look like they are set to increase by double digits over the medium term, and this is only taking into account Eskom hikes.

If you live in a municipality which supplies electricity, cash-strapped local governments are using electricity sales to build revenue, so administered prices are going to go way up before they come down.

The government is well aware of this, as the theme is laced through the budget documents, but there is little it can do right away because of the huge debt-books carried by the state-owned enterprises and guaranteed by the government. 

Better news for civil servants

The 1.3-million-strong civil service has been a significant contributor to building a black middle class, and it has helped consumption-led growth. Government entities add to the figure, so civil service employment can be a net good.

So, if you are middle-class and working in the civil service, the news is somewhat better. "The 2018 public service wage agreement exceeds budgeted baselines by about R30.2bn through 2020/21."

What does this mean in practice? "The main driver of increased spending is large increases in wages and other employee benefits, rather than increases in employment. The increase in average real wages is partly explained by above-inflation agreements reached between government and unions, but wage progression and promotion policies account for a considerable proportion of the rise," according to the budget policy statement.

So, for the middle-class in the civil service, salaries and benefits, as well as promotion increases, are all headed north. In addition, there is significant job protection.

A dual middle class

One of the key agreements hammered out at the Jobs Summit earlier this month is that there will be no retrenchments in the civil service. On Wednesday, Finance Minister Tito Mboweni said the government was working on plans for early retirement for older civil servants on full benefits.

Per capita remuneration in the public service has grown from R263 000 in 2006/07 to R364 000 in 2017/18. The successful wage negotiations by the public service through the years of democracy has meant that, measured by salaries, civil servants, in the main, are no longer working class but middle-class.

The budget statement reveals that "The combined effect of these trends shows that between 2006/07 and 2017/18, the number of public servants earning less than R10 000 per month (in 2017 Rand) fell by half, while those earning more than R30 000 per month increased five-fold."

South Africa’s precarious economy and its strong public service unions have created a middle-class of duality: one, private sector based, which is at risk of downward mobility. And the other, which is public-sector employed, that is protected and remunerated at rates higher than in the private sector.

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