Wage deal may not be a big risk to budget framework

Over the past three years the government has bent the curve on public sector pay, halting a decade-long trend of above-inflation wage increases that had seen the payroll’s share of public spending rise steeply.

The new two-year wage settlement the government and public sector trade unions now seem set to sign would continue that trend, bringing an unexpectedly early end to the usual pay dispute. But it would add R35bn-R40bn of unbudgeted government spending over the next three years. And it leaves many unanswered questions about what level of personnel spending is sustainable, and what kind of public service the government wants and SA needs.

At the time of writing the settlement had yet to be concluded, but it provides for a 7.5% increase in the coming fiscal year, starting April 1, followed by an increase in line with consumer price inflation (as projected by the Treasury) for the next year, 2024/25.

But this year’s increase is really 3.3% rather than 7.5%. That’s because it includes the R1,000 a month after tax cash gratuity public sector workers were granted in 2021, and again in 2022, which was due to fall away once a new wage settlement was reached. So the increase for the first year is not that far above the 1.6% the Treasury had pencilled in — to avoid pre-empting a settlement. It’s also below the projected inflation rate of over 5.3%.

The Treasury had long made it clear it wanted to end the trend of “automatic indexation” in government spending generally, and specifically in pay, where in each wage round the public sector trade unions automatically sought and won cost of living increases of inflation plus one or two or even 4%.

Over the decade before the Covid-19 pandemic public sector pay increased by an average 2% above inflation each year. And from about 2015 the headcount was declining, so most of the money went on higher wages and salaries, not more frontline staff. That drove the public sector wage bill up to more than 34% of government spending by 2019.

At that level it was in line with the Scandinavian countries and higher than the US and many emerging markets. It was also crowding out government spending on medicines or textbooks or infrastructure and was a factor driving government debt up to unsustainable levels. The wage bill was also growing faster than the economy was growing.

The turning point came in 2020, when the government froze wages as Covid-19 pushed public finances into crisis. Then in 2021, it put the cash gratuity in place as a temporary measure, renewing this in 2022 when it also unilaterally imposed a 3% increase when no agreement could be reached. That intervention to bend the curve in 2020 ultimately saved the government hundreds of billions of rand, though it made for unhappy labour relations.

The new two-year settlement would require that the majority of unions in the Public Sector Coordinating Bargaining Council (PSCBC) accept the employer’s revised offer.

Crucially, however, even once it does, the Treasury also has to agree to the deal. It has an effective power of veto after 2022’s Constitutional Court judgment that upheld the government’s 2020 decision not to implement the third year of the 2018 wage agreement. In theory, if the Treasury decided the government could not afford the new agreement, it could refuse to sign. Even if it does, the big question is whether it allocates new money to fund the extra spending, or requires departments to find the money.

Finance minister Enoch Godongwana signalled in February that he might do just that: an unbudgeted wage settlement would mean funds must be clawed back in other ways, he said in his budget speech. “Mainly this will mean restricting the ability of departments and entities to fill non-critical posts. It will also mean achieving cost savings from major rationalisation of state entities and programmes,” he said.

The trade-offs that have been forced on the government with a series of unbudgeted wage increases over the past many years are at the heart of the issues, not just about sustainability but critically about the structure of the public service and the quality of service delivery. The wage bill is the product of a bargaining process outside the budget, not of a deliberate policy debate about how money should be spent. The result in SA’s case is perverse consequences.

One of these is the extent to which pay increases have been at the expense of headcount, particularly in the police but also to an extent in teaching and nursing. Studies by the Treasury and Wits academic and former budget office head Michael Sachs have highlighted the extent to which the number of police, in particular, but also of teachers and nurses, has not kept up with population growth. Inevitably that has affected service delivery.

Another big issue is who gets the money within the public service — and the dynamic there, essentially, is that the increases have gone largely to junior and middle grades, at the expense of senior management and supervisory skills. The PSCBC negotiates wages only for the bargaining unit employees the unions represent, which is up to middle management level.

At senior and executive levels, it is the Treasury that decides whether increases are affordable. And given the budget constraints, and the need to signal restraint, it has not been kind. Senior managers such as directors-general and their deputies and heads of departments had not had a cost of living increase in 20152022, when they were included in the 3% unilateral increase.

Many departments are top-heavy and there are plenty of deployed cadres who are less than competent. Equally, however, there are still good senior people in the government, and the pay structure has made it harder to retain them.

Assuming it is signed, this year’s settlement will build on the shift to moderation of the past three years and may not prove as much of a risk to the budget framework as many in the market have feared. But it will do nothing for the quality of the public service unless it addresses the broader trade-offs.