Given the perilous state of the government’s finances, slashing the public sector wage bill is a critical impediment to South Africa’s economic recovery plan, Business Unity SA (Busa) CEO Cas Coovadia warned in a briefing on Monday.
“As South Africa considers the path towards recovery and the risks the government’s fiscal policy poses to that recovery – the capacity and cost of the state and in particular the public sector wage bill is a crucial factor,” he said.
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Busa is upping its ante around the hot button issue following Finance minister Tito Mboweni tabling the 2020 Medium-Term Budget Policy Statement (MTBPS).
The organised business federation is effectively backing Mboweni, who himself has warned about the state’s ballooning wage bill putting the country at risk to a debt and potential fiscal crisis, if not brought under control.
Busa has even commissioned Intellidex to do a research report on various aspects of SA’s public wage bill, to reinforce its position on the matter.
The report titled “The Public Sector Wage Bill – an evidence-based assessment and how to address the challenge” was released on Monday, ahead of Busa’s briefing.
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“Downward adjustments to the state’s payroll can be made either by reducing wages, reducing headcount, or doing both,” Coovadia said, as he reiterated suggestions contained in the report.
“These are very difficult decisions, but the country has jumped off the cliff and we need to achieve a soft landing,” he said, adding that hard decision need to be made.
“An essential element of a soft landing is a decrease in the public sector wage bill. If we assume a drop in nominal GDP of 4% this year and increases of 4% in each of the next two years, and we want to decrease payroll costs by 10.5% by 2025/26, aggregate payroll costs can increase by no more than 1.8% a year in nominal terms,” he pointed out.
Coincidently, the proposed contained growth of 1.8% in the public sector wage bill is a figure also cited by Mboweni in his latest MTBPS.
“SA needs to address high payroll costs, with costs rising too quickly and public sector employment being increasingly unproductive. This is a tough task and will require government, labour and business working together to achieve this,” said Coovadia.
Highlighting key aspects of the report around the state’s wage bill, he said the study showed that there is no “optimal” size for a public service, however, SA “probably needs one that is reasonably large” because of the socioeconomic issues that need to be addressed.
“The report finds the South Africa public service is not large in per capita terms, but unusually well remunerated, when compared to a basket of 46 countries looked at by the International Monetary Fund [IMF],” said Coovadia.
Public sector wages in SA are higher than the average of the countries in the IMF’s Worldwide Bureaucracy Indicators (WWBI) database, which includes the likes of Bangladesh, Greece, Brazil, Norway and Denmark. Countries from Europe, Africa and South America are part of the database, with a large number being emerging market nations.
Other highlights include:
- Payroll costs in SA are larger than the global norm as a percentage of GDP, public spending, or tax revenues. Public sector wage increases as a percentage of tax revenues has grown from 31% before global financial crisis to 41% in 2009/10, in face of global slowdown, and has stabilised to around 37%. The percentage exceeds 50% of revenues this year and will be 47% next year and 45% in 2022/23.
- The average remuneration of public servants in SA is high by international standards and when compared to private sector employees and per capita GDP. Teachers’ salaries, measured in purchasing power adjusted US dollars, are nearly 50% higher than the OECD (Organisation for Economic Co-operation and Development) average.
- The IMF data on 46 countries for 2017, shows public sector compensation for national government, provincial government and state entities was an average of 9.4% of GDP. SA was at 11.6% (25% higher than international average) and 15% of GDP in 2019.
- Compensation spending went up from R154 billion in 2006/7 to R518 billion in 2018/19. This is a 78% inflation-adjusted increase, while increases in headcount went up by 22%. Payroll costs have increased by a compound average of 10.5% since 2006/7, compared to average growth of nominal GDP of 8.2%.
- Fastest increases are at bottom of staff distribution.
- There is no indication that there are any productivity increases to justify wage increases.
- Increase in wage costs from 2006-2019 outstrip the rate of economic growth and productivity.
While the report recognised differences in constitutional models between the countries featured in the IMF’s WWBI database, Coovadia noted that “it is clear that SA” has the highest ratio of compensation to public spending, with over 35% allocated to compensation.