National Treasury will have to wipe out its contingency reserve to fund public sector wage increases for the next three years. But this alone will not be enough to finance the above inflation increases that were agreed to this year but not budgeted for. Government departments will have to make significant cuts to help finance the shortfall.
In spite of Finance Minister Nhlanhla Nene’s warnings in the February budget that above inflation increases were not affordable or in the country’s best financial interests, civil servants secured a 10.1% wage increase earlier this year.
While the 2015 wage settlement was billed as a 7% increase, which made it a palatable one for rating agencies and economists, Nene’s medium term budget policy statement (MTBPS) confirms that the real cost is much higher when benefits are taken into account.
This means that government employee salaries are now the fastest growing line item on the budget after debt servicing costs. While this wage agreement will be binding for three years, the MTBPS sets that Nene tabled in parliament explains who the wage agreement creates a budget shortfall of R12.2bn for this financial year, R20.6bn for next year and R31.1bn in 2017/18.
To finance this contingency reserves will be drawn down by R5bn this year, R10bn the next and R26bn in the last year of the wage agreement. The balance of this shortfall will be funded with existing department budgets and, as a result, departments will have to postpone plans to expand or fill vacancies.
While national budgets have warned against ballooning wage bills and the way they crowd out other important government spending for several years, treasury’s recent review of 13 departments shows how aggregate compensation in these departments “more than doubled” between 2008 and 2014.
When asked if treasury’s calls for the wage bill to be contained were being ignored and if this was a sign that there was no political support for the financial plan that treasury crafted for the country, Nene told journalists before delivering his speech in parliament that: “The wage bill is a negotiated settlement that all parties agreed to.
“But, we cannot pretend that the consequences do not have an impact. This has wiped out the contingency reserve and still leaves us with a shortfall that provinces and departments will need to find… It is not a treasury issue, it is a government matter. Beyond the contingency reserve all departments have to carry the cost of the settlement that we as government negotiated.”
This means that departments that had planned to expand headcount or fill vacancies need to postpone their plans. While some institutions will need to reduce the number of people they employ, departments will shift funds from other budget lines to meet their compensation commitments. Most of these resources will be drawn from goods and services and capital budgets.
The MTBPS also flags how the quantity of public money being used to remunerate public servants is not matched by quality output. While Nene confirms that government is looking into ways to “strengthen the link” between performance, productivity and pay in the civil service, the MTBPS also raises questions about government’s inadequate human resource planning which has allowed the civil service to lose key professionals while gaining managers. This undermines the quality of government services.
“The moderate decline in employee headcount has been strongest among professionals in the front line of service delivery while employment of managerial and policy staff appears to be growing,” reads the MTBPS which sets out how more managers and fewer professionals has a negative effect on services and, in turn, higher salaries, close down prospects of filling vacancies left by professionals and specialists.
But, this is not a new warning and will not come as a surprise to government either.