The success of finance minister Tito Mboweni’s medium-term budget policy statement (MTBPS) will depend on difficult negotiations with public sector trade unions – something the government has a poor track record with, says Fitch Ratings.
In a note on Thursday (29 October), the credit rating agency said the government needs to see a substantial improvement in the primary main budget balance by almost 10 percentage points of GDP between 2021 and 2026 – which remains subject to large risks.
The projections presented by Mboweni depend on expenditure reductions of 1.1% of GDP in 2022, rising to 2.5% in 2024. However, these reductions come from highly uncertain savings on public sector compensation, the ratings firm said.
“The MTBPS assumes that the government can impose a wage freeze for the next three fiscal years (effective wage growth of 0.8%), against inflation of around 4%.
“The current wage agreement from 2018 will expire in April 2021 and it is likely that negotiations for the new agreement will take at least until then.
“The track record on negotiating wage agreements in line with budget assumptions is weak, and there is limited room for offsetting measures in other expenditure areas,” it said.
Fitch said that the broader environment for debt stabilisation is also challenging. “The government expects the economy to recover next year, and it also expects output to remain below its 2019 level until at least 2023.
“Despite the Economic Reconstruction and Recovery Plan released by the president, Cyril Ramaphosa, in mid-October, growth will remain weak.
“Tensions within the governing African National Congress will also hamper policy-making and exceptionally high inequality raises social pressure for additional spending.”
Fitch kept South Africa’s rating on negative outlook following the downgrade to ‘BB’ in April, partly due to the prospect of further significant pressure on government debt.
Agreement with unions may not be possible
Commenting on the public wage bill plans in the budget, Intellidex analyst Peter Attard Montalto echoed the sentiments of many post-budget reviews, saying that basing future estimations on a 0% wage increase for public workers may already put the budget outside the realm of reality.
“We are pessimistic on the implementation of the cuts in the compensation budget, based on zero nominal wage increases and only small allowances increases,” Attard Montalto said.
Government does have a degree of optionality – at the most extreme, just imposing a solution, he said. However, with a court case coming and wage negotiations not even started yet, political agreement with unions may not be possible.
“Mboweni must have had political sign off to publish this wage path, but implementing it would be another matter, and we have never heard the President back anything like this publicly. Things are also unlikely to be clearer in February.”
The public sector wage bill court case on this year’s freeze is only starting on 2 December and in February is likely to be ongoing under appeal and not resolved.
“We only see it resolved through the Constitutional Court in the middle of 2021 with further delay risk. This adds significant backpay risk,” he said. Should government lose the case, as much as R294 billion in back-pay could on the cards.
“There is significant strike risk from unions stemming from this outlook. We see political commitment to this as paper-thin,” he said.
Failing union support for the wage freeze, Attard Montalto said the government has some heavy-handed options open to it, including:
- Cut workers, targeting the least productive ;
- Impose wages unilaterally;
- Cut allowances and stop progression and other perks.
“Overall there is a lot resting on this one issue,” the analyst said.
Ready to strike
Meanwhile, civil servants have already got ahead of the narrative around the wage freeze, threatening to down tools and strike if the government moves forward with the plan.
The Public Servants Association (PSA) said it will meet on Friday to discuss the issue raised in the MTBPS, but maintains that it will head to the streets if the government does not increase salaries.
The PSA has rejected government’s claims that it does not have money to fulfil its previous wage agreements, saying that the state needs to recover the funds from those who have benefitted from corrupt tenders and contracts.
“There is no consequence management,” said PSA Labour relations manager, Jannie Oosthuizen. “It’s not just corruption with PPEs…frivolous litigation processes that government institutes – this is where the employer can save money in order to afford the wage agreement.”
If the PSA wins its court battle with government over the wage agreement, Oosthuizen said the state will have to find the money “somewhere”, adding that if it does not, it will have a massive impact on all collective bargaining councils and the future of wage negotiations.
Oosthuizen said that indications from government are that it’s waging a war on collective bargaining – something that the PSA is ready to defend at all costs.