The biggest threat to the 2023 budget
South Africa’s public sector wage bill remains the biggest threat to maintaining a balanced budget, say economists at Nedbank.
Public sector unions announced on Thursday (16 February) that they were gearing up for a massive, indefinite strike period over wages, continuing the battle that raged on for months in the latter part of 2022 after the National Treasury implemented an across-the-board 3% wage hike.
For analysts and economists, Treasury’s resistance to the pressure from the unions indicates a shift in political will to make good on its promises to rein in aggressive spending.
According to Bank of America Global Research, the era of wage increases substantially above inflation seems to be over, with the group broadly expecting the 2023 budget next week to show the National Treasury continuing to stick to this line.
Economists at Absa are more pragmatic, though in agreement, saying that Treasury is likely to announce a 0% increase for public wages in 2023, but only as a starting point for the coming negotiations with unions – allowing it to start off a low base.
Nedbank has warned, however, that the public sector wage bill remains the main item threatening to increase the baseline expenditure ceiling in the budget.
In the Mid-Term Budget Policy Statement, National Treasury revised total compensation growth to 4.2% for 2022/23 from the 2.8% projected in Budget 2022.
At the same time, the increases for 2023/24 were set at 2.5%, while the compensation bill was projected to rise at an average of 8.4% a year between 2024/25 and 2025/26 as the number of personnel in education, health and policing increases.
In the current negotiations, the government has tabled an offer consisting of 3% pensionable and 4.5% non-pensionable remuneration, costing just over R30 billion in additional spending in 2022/23.
“The public sector unions have effectively rejected this offer as they hold out for increases close to the 7% and 6.5% secured by the Eskom and Transnet unions, respectively,” Nedbank said. “We assume the wage bill will rise by around 5% per annum over the (medium term),” the bank said.
As a result of higher-than-expected wages, the government will have to turn to restrictions on hiring and caps on managers’ salaries to help the public sector contain the growth of its wage costs, it said.
According to business consultancy Global Business Solutions, a key factor at play in both the public sector wage negotiations and wider negotiations across various sectors is inflation.
While the January headline inflation rate of 6.9% reported by Stats SA this week is “very good for the economy and a very good sign for interest rates declining going forward,” the group said, it is also going to create an “interesting” environment for wage negotiations.
This includes non-negotiated wages like the National Minimum Wage.
Negotiations are generally done off the CPI of the last available month, which was 7.2%, GPS said.
“If inflation continues to come down, it would be interesting to draw a parallel between many of the settlements that were around 8% in collective bargaining last year.
“If CPI comes down to 5% for the year – which is predicted by many analysts – then those collective bargaining increases for the 2023 and 2024 years will be very expensive,” it said.
This would be particularly expensive for the National Treasury, where public sector unions are demanding wage hikes of up to 10%. Such an increase, if every implemented, would end up being double the rate of where inflation is expected to land.
Absa noted that there is simply no room in the budget for “unplanned” spending of this nature.
“The MTBPS pencilled in a mere 1% uplift in the envelope for public sector compensation, implying a 0% cost of living adjustment, with the uplift in the overall pay envelope mostly reflecting automatic pay progression.
“We believe the NT is likely to follow the same approach in the Budget – i.e., pencilling in no wage adjustment – so as to set a low base from which to commence wage negotiations with unions.
“Ultimately, of course, the government and organised labour are likely to settle higher. Even last year, when negotiations were deadlocked, the government imposed a 3% pay hike on top of the 1.5% automatic pay progression,” the bank said.
For FY23/24, Absa’s economists assume a 5.5% all-in rise in public sector pay as public sector unions push to recover at least some of the real income loss suffered over the past year due to the below-inflation wage adjustment. This would at least put increases slightly above where inflation is anticipated to land.
However, the bank warned that each percentage point adjustment in public sector pay is worth about 0.1% of GDP onto expenditure and the deficit, everything else being equal.
“In the MTBPS framework, there was no unallocated reserve in FY23/24 that could cover a reasonable wage increase – just a R6 billion contingency reserve.”
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