While the South African Revenue Services continued to collect more from personal income taxpayers in 2018, the amount collected does not come close to covering government’s wage bill.
This is according to chief economist at economists.co.za, Mike Schussler, who recently published a series of graphs looking at how government’s wage bill has continued to climb upwards over the last decade.
Schussler noted that South Africa currently has one of the ten highest Personal Income Tax (PIT) to GDP burdens in the world – with an upper rate of 45% kicking in for those who earn R1.5 million per annum.
In comparison, a country like the US has an upper range of 40% for those earning higher than R6 million.
Government wages as a percentage of GDP, meanwhile, sits at around 14% – far higher than the global average of 10% and OECD average of 10.4%, with the government wage bill being 42% higher than the total collected from personal income tax.
According to Schussler, government’s wage spending extends beyond the 14% of direct costs, with outsourcing costing around 8% of GDP for government.
“Some of this is duplicating government functions, and some is needed.
“But this 20% odd of GDP on wages and hiring other people to do the job that government employees should be doing is not sustainable for any country,” he said.
Compared to emerging market economies South Africa is also an outlier, according to Schussler.
Most fast-growing emerging markets spend less than 10% of their GDP on government wages. For example, China is at 7%, Nigeria was at 4%, and while Costa Rica and Brazil are higher (also around 14%) they are not growing fast, the economist said.
Wages keep getting higher
When looking at how these wages have increased over time, Schussler said that government salaries have increased more than inflation, the JSE all share, and the average commercial salary over the past ten years.
Commercial sector wages increase at twice the rate of inflation, while the government wage bill over the last ten years increased by three times more than the CPI.
If things continue along this path, Schussler said that it will be extremely damaging for the economy, as a higher wage bill means there is less money for the things the country needs to grow – specifically infrastructure, education and health.
“We are already far behind on infrastructure,” he said. “We will have less money for medicine and for school books – and we already see the impact of not having enough HIV or Diabetic drugs.
“Without infrastructure, the economy cannot grow – and as the wage burden becomes more, government will have to find more taxes (such as carbon tax) and may stop increasing the personal tax brackets for inflation. This leads to even less growth and even higher taxes.”
To combat this spiralling problem, Schussler said the government will have to keep the government wage bill below 10% for about a decade, which is as incredibly difficult ask.
It will have to develop skills, stop outsourcing functions, and significantly reduce the number of government employees.
“The top management structure also needs to be cut as well as a number of ministers. We should have no more than 18 to 20 ministers,” he said.