Here’s the REAL price of the government gravy train – hefty taxes, vulnerable economy - Biznews

Jonathan Katzenellenbogen

Government and the unions are heading into a battle royale over the bloated public sector wage bill. The trade union federation, the Congress of South African Trade Unions (COSATU) has said it is “battle ready” and willing to “collapse” public services if government fails to adhere to the present wage deal.
Government wants to go back on a three-year deal reached in 2018 that was made on overly generous and unaffordable terms.

Unions will have to put up a big fight over the proposed renegotiation of a wage deal, as the public sector is now their most important turf. While union membership has fallen in the private sector, it has risen sharply in the public service, making this battle an important show of power for organised labour.

Having laid down the gauntlet on this matter, the government cannot afford to lose.

SA’s economic future at stake
There is much at stake for South Africa’s economic future in whether government can implement the R160bn in wage cuts over three fiscal years, proposed by the Finance Minister, Tito Mboweni, in his Budget Speech last week. The proposed savings in payroll for this year amount to about six percent of what government paid civil servants in the fiscal year that ended last month. Without a deal, the fiscal deficit could go into dangerous territory, well above the already high deficit of nearly 7% of GDP.

Moody’s, the rating agency which has held off from downgrading SA to junk status, has already said it is sceptical about the ability of government to come up with cuts in the wage bill.

Although the proposed wage bill saving is not earth-shattering in its size, a successful outcome for the government from wage talks could be symbolic as a milestone on the path to the stabilisation of public finances. If government fails to achieve its desired settlement it will show that reform to get the country back on track is, for the moment, politically impossible.

Success could pave the way for government to make inroads against union power in the state-owned enterprises. That is why the unions will be tenacious in the fight against attempts to change their current wage deal. Whether the government has the political will to take on the unions  and put an end to bail-outs is doubtful.

Bloated public service
In many countries the civil service is expanded and given good pay to maintain and build political support. Under President Jacob Zuma, there was a massive increase in the civil service accompanied by rising pay and benefits. The numbers have slightly dropped in recent years; however pay and benefits have been highly generous and above the inflation rate.

Public-service compensation has grown by about 40% in real terms over the past 12 years, and the wage bill remains the largest component of public spending.

But there is always a time of reckoning when the budget deficit and debt build up. These simply do not permit the gravy train to continue. Around the world attempts to curtail civil service pay or cut jobs have proven very difficult. No job cuts have been proposed in South Africa, but in future the government may well have to do this.

The unions say there should be severe cuts to ministerial pay, that the corrupt should pay back the money, and key posts must be filled for the public service to operate properly. That may be valid, but the reality is that money is running out, the government is increasingly constrained in its borrowing, and productivity is low in the public service.

According to an IMF study released last year, in 2016 public service salaries in developed countries averaged 20 percent of government spending, and 30 percent in developing countries. South Africa’s spending on government employee compensation was 34 percent of total spend last fiscal year, down from nearly 37 percent two years ago.

Not only is South Africa’s civil service pay above the developing country average as a share of spending, it is also on average, and unusually in global experience, above that of the private sector in this country.

A wage renegotiation desired by government would reduce the share of compensation in total spending by just 1.5 percentage points, and give slightly more space for servicing debt. One big negative consequence of of the bloated public payroll is that the Government is having to increase its borrowing to sustain its salary payments.

Unsustainable borrowing costs
It is also borrowing to meet debt service payments which, over the three fiscal years from the beginning of March, will be the fastest growing component of spending at more than 12 percent.  In turn, these items are crowding out the type of spending like infrastructure and other capital spending which might contribute to longer-term government revenue and economic growth.

Even with the sort of cuts proposed in the Budget, South African public debt is on an unsustainable trajectory and heading into a clear danger zone. This trajectory will mean rising borrowing costs and must raise the risk of either default or the need for outside financial assistance. South Africa’s borrowing costs have more than doubled since 2009 and are now higher than comparable emerging markets, according to the IMF.

Over the past decade, South Africa’s debt to GDP ratio has doubled and is now well above the emerging market average of 50 per cent of GDP. At the end of the  fiscal year 2019/20, the National Treasury expects that South Africa’s debt to GDP ratio will be slightly below 61 per cent, and in three years time it forecasts this to be nearly 72 per cent.

While the debt is mostly domestically held and denominated in Rand, the government is simply not taking in enough revenue to sustain this debt and economic growth is negligible. Moreover, spending on salaries and state-owned company bailouts are a sheer waste in terms of generating economic growth.

The currency has been hammered by the alarm over the spread of the COVID-19 virus, and there could be more to come. The prospect of a downgrade at a time of immense global uncertainty over the economic impact of the virus will impose even higher borrowing costs on both taxpayer and corporate borrowers. South Africa is paying an increasingly heavy price for the gravy train and is now without means to cushion international shocks.

Jonathan Katzenellenbogen is a Johannesburg-based freelance journalist. The views of the writer are not necessarily the views of the Daily Friend or the IRR.

This article was first published on the IRR's online publication, Daily Friend.

https://www.biznews.com/thought-leaders/2020/03/04/real-price-government-gravy-train