Government plan to cut wage bill ‘likely to fail’

By Bloomberg Time of article published Feb 28, 2020

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The credibility of the government's proposals to curb debt and save South Africa's sole investment-grade credit rating will be put to the test by powerful labour unions outraged by plans to pare back the wage bill.

The government is seeking to backtrack on a three-year pay deal agreed with civil servants in 2018 and cut personnel spending by R37.8 billion in the year to March 2021.

The allocation for pay was also cut by R122.4bn for the next two years to offset the effect of lower-than-expected economic growth and tax revenue, according to the Budget review Finance Minister Tito Mboweni presented on Wednesday.

Although financial markets cheered the news, with the rand gaining as much as 0.8 percent against the dollar, the government's ability to hold firm against its 1.3million state workers who've consistently won inflation-beating increases is in doubt.

Cosatu, the country's largest labour group, is a member of the ruling coalition and President Cyril Ramaphosa is indebted to it for helping him win control of the ANC in late 2017.

“The Budget is dependent on significant wage cuts,” said Investec Asset Management analysts Nazmeera Moola and Sisamkele Kobus. “There is absolutely no agreement with unions to achieve this, so at best this is a negotiating tactic.”

The economy is set to expand an average of only 1.2 percent a year to 2022, and the budget deficit is projected to reach 6.8 percent of gross domestic product in the year to March 2021 - the highest since before apartheid ended in 1994. The state wage bill has surged 40 percent more than inflation over the past 12 years, and accounts for more than a third of total government spending.

The government isn't planning to cut or reduce wages, according to Dondo Mogajane, the National Treasury’s director-general. It’s proposing a 1.5 percent increase for the coming year and 4.5 percent in each of the next two years, he said, adding union concerns will be taken into account.

“We are opening up and saying ‘there are no holy cows here, let’s talk,’” Mogajane said in an interview. “The budget deficit is not going to be 6.8 percent, it’s going to be around 7 percent, or right up to 8 percent if we factor out the wage proposal. We are prepared to open the conversation with labour to ask what else to cut.”

Mboweni conceded that difficult discussions with the unions lay ahead, but expressed confidence that “we will be able to find each other”.

Cosatu was less conciliatory, accusing the government of trying to force workers to bear the brunt of years of economic mismanagement and unchecked graft.

“The way the state has gone about notifying the workers is in extremely bad faith and dangerous,” said Matthew Parks, the federation's parliamentary officer. “It causes anxiety among our members and collapses the space to engage.”

Civil servants last staged a strike in 2010 that dragged on for three weeks before they were awarded an inflation-beating 7.5 percent raise.

Moody’s Investors Service is the only major ratings company that still assesses South Africa's debt at investment grade and is scheduled to make an announcement on the rating next month. 


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