President backs Mboweni's public wage reduction plan
In a carefully crafted response to the ongoing wrangle between the government and public sector unions, Ramaphosa said in his weekly newsletter yesterday that a large part of the savings would come from reducing the rate at which the wage bill grows rather than cutting the number of jobs.
“Our approach is not to dramatically cut the size of the public service, but to examine the rate at which wages grow,” he said. “Public service wages have, on average, increased at a much higher rate than inflation over many years, and we need to fix this if we are to get public finances under control.”
Last week, Mboweni announced R160.2billion adjustments on the wage bill over the medium term, with R37.8bn earmarked to be saved in the next financial year, in a bid to narrow the public debt. The wage bill remains the largest component of spending by economic classification.
The last wage agreement in 2018 was significantly higher than budgeted and the government has made a formal request to renegotiate this settlement.
According to the existing three-year wage agreement implemented from April 1, 2018, government employees on salary levels 1 to 12 were granted salary increases of between 6 and 7percent for 2018, and inflation plus 1percent for 2019 and 2020 on assumption that inflation remained at 5.5percent.
Ratings agencies Moody’s and Fitch have said the fiscal deficit would reach 7.5percent of the gross domestic product if the government fails to contain the rise in the wage bill.
Old Mutual Investment Group chief economist Johann Els said reducing the rate at which wages were growing would allow thousands of employees to keep their jobs.
“I think that the president (Ramaphosa) took a lot of political capital to make this decision to cut wages. It just shows that he is willing to make difficult decisions and this is a big, brave decision,” Els said.
“To make up that R160bn they want to save elsewhere is equivalent to raising the VAT rate from 15percent to 17.5percent. And then it would hurt 59million people, but now it impacts 3.5million people.”
Ramaphosa said reducing the wage bill would require focused discussions among all social partners, but particularly with public sector unions.
“These engagements need to be conducted in a spirit of seeking solutions. I am heartened by the willingness of all parties to engage in serious negotiations aimed at finding a solution,” he said.
Els said there were still “huge implementation risks” in renegotiating the existing wage agreement as trade unions are against it.
“That probably means around inflation minus 3percent wage increases. I have said previously that if we can limit the wage bill growth over the next three years to 4percent a year, we can save R104bn. They went further than that and their wage bill growth is only 3.5percent on average over the next three years,” Els said.
“But if they don’t get the savings in the first year, then the second and third year’s numbers would be at risk as well in terms of savings.”