Budget 2020: Wage War – Facts vs Fiction

Budget 2020: Wage War – Facts vs Fiction

By Pieter Faber, SAICA Senior Executive: Tax

The Finance Minister Mr Tito Mboweni announced on Wednesday, 26 February 2020 in the Budget Speech that much intervention is required to address the cost of wages in the public sector and has proposed reducing the public sector compensation bill by R160 billion over 3 years. This has been welcomed by many but the trade unions are not happy.

One of the reasons the trade unions are unhappy is that they are of the view that because the public sector employee compensation has remained at about 35% or so of the total expenditure over the last decade, wages are not the problem.

However, on closer inspection it seems that their statement is debateable and that the Minister is in fact accurate. The reason being is that the trade unions are referring to the expenditure mix i.e. how much wages are as a ratio in relation to other public expenditure. However, the Minister is referring to affordability, which is an expenditure item relative to government revenue. If we had to accept the unions’ argument as a good measure, government could just spend R200 billion more on goods and services funded through debt and the ratio of wages would as a result of this be corrected. However, it is obvious that it would not have improved the country’s financial position.

When compared to tax revenue collected over the last 12 years (i.e. affordability), another reality emerges. The public sector wage bill has not remained constant and has grown from just over 30% to over 40%. When compared to Gross Domestic Product (i.e. the country’s overall economic ability to generate tax revenue), it has consistently grown from 10,29% in 2001, to 10,73% in 2011 to 12,3% in 2021. These increases might not appear large, but one must consider that that GDP equates to approximately R5.4 trillion. The wage bill (and not even total employee numbers) has been tracking government expenditure growth at over 10% per annum even though the country’s revenue has not kept pace.

This represents enormous growth in the affordability of the public sector wage bill as it relates to what government can afford (i.e. as related to revenue) and to what the country can afford (i.e. as related to GDP).

The discussion on the wage bill may only be a red herring, as the real debate is around the lack of accountability and productivity in the public sector. The trade unions claim that public sector staff are overworked, but is this factually true? Lack of accountability in the public sector is well documented by the Auditor General and others and it can be argued that service delivery needs to improve.

The latter criteria of productivity is a lot more difficult to address given the lack of effective and transparent productivity measures in the public sector. Some have tried to analyse productivity like ‘Prophet Analytics’ in their 2012 quarterly Labour Market Navigator found that private sector employee productivity was 450% higher than in the public sector employees. In 2015 the Financial and Fiscal Commission found that government was not doing enough to provide services “efficiently, effectively and economically”. The Minister, in 2019, and this year in 2020 concedes as much, stating this year that civil servant’s salaries have grown by 40% in real terms (i.e. after accounting for inflation) but without the equivalent increase in productivity. These may all be persuasive rather than conclusive factual findings as it relates to productivity, but seems to affirm what the public is experiencing on a daily basis.

However, the conclusion of our reality remains stark. First, South Africa cannot afford its public sector at the current level of economic growth stagnation and budget cuts for compensation and benefits are required. The second economic reality is that compensation only becomes problematic if it lacks concomitant productivity. If the public sector trade unions want the public outcry around service delivery to reduce, they, together with government, need to collaborate in implementing, as a matter of urgency, an effective and transparent productivity enhancement plan and ensure accountability is enforced vigorously across the public sector.