The most serious threat to the 2023 budget

According to experts at Nedbank, South Africa’s public sector wage bill remains the greatest danger to maintaining a balanced budget.

On Thursday (16 February), public sector unions stated that they were preparing for a large, indefinite strike over salaries, extending the conflict that raged for months in the latter half of 2022 when the National Treasury approved an across-the-board 3% salary raise.

According to experts and economists, Treasury’s resistance to union pressure suggests a shift in political resolve to follow through on its vows to rein down excessive spending.

According to Bank of America Global Research, the period of salary rises that are significantly higher than inflation appears to be finished, with the bank widely anticipating the National Treasury to stay to this line in the 2023 budget, which is due out next week.

Absa economists are more realistic, but think that Treasury is likely to declare a 0% rise for public pay in 2023, but only as a starting point for the next discussions with unions, allowing it to start from a low base.

Yet, Nedbank has cautioned that the public sector wage bill remains the major danger to the budget’s basic expenditure cap.

Meanwhile, the increases for 2023/24 were set at 2.5%, but the compensation bill was predicted to climb at an average of 8.4% per year between 2024/25 and 2025/26 as the number of workers in education, health, and law enforcement increased.

In the present discussions, the government has proposed 3% pensionable and 4.5% non-pensionable salary, which would cost little over R30 billion in increased spending in 2022/23.

“The public sector unions have effectively rejected this offer as they hold out for increases close to the 7% and 6.5% secured by the Eskom and Transnet unions, respectively,” Nedbank said. “We assume the wage bill will rise by around 5% per annum over the (medium term),” the bank said.

As a result of higher-than-expected pay increases, the government would be forced to impose hiring limitations and salary ceilings on managers to help the public sector maintain labour expenditures, it said.

Inflation, according to business consultant Global Business Solutions, is a crucial element in both public sector pay talks and broader discussions across multiple industries.

The January headline inflation rate of 6.9% revealed by Stats SA this week is “very good for the economy and a very good sign for interest rates declining going forward,”according to the organisation, but it will also create a “interesting” atmosphere for wage talks.

Non-negotiated salaries, such as the National Minimum Wage, are included.

According to GPS, negotiations are often based on the CPI of the most recent accessible month, which was 7.2%.

“If inflation continues to come down, it would be interesting to draw a parallel between many of the settlements that were around 8% in collective bargaining last year.

“If CPI comes down to 5% for the year – which is predicted by many analysts – then those collective bargaining increases for the 2023 and 2024 years will be very expensive,” it said.

This would be especially costly for the National Treasury, since public sector unions are demanding 10% salary increases. If executed, such an increase would wind up being twice as high as the predicted rate of inflation.

Absa stated that there is just no place in the budget for such “unplanned” spending.

“The MTBPS pencilled in a mere 1% uplift in the envelope for public sector compensation, implying a 0% cost of living adjustment, with the uplift in the overall pay envelope mostly reflecting automatic pay progression.

“We believe the NT is likely to follow the same approach in the Budget – i.e., pencilling in no wage adjustment – so as to set a low base from which to commence wage negotiations with unions.

“Ultimately, of course, the government and organised labour are likely to settle higher. Even last year, when negotiations were deadlocked, the government imposed a 3% pay hike on top of the 1.5% automatic pay progression,” the bank said.

Absa economists forecast a 5.5% all-in increase in public sector pay for FY23/24, as public sector unions try to recoup at least part of the real income loss incurred over the last year as a result of the below-inflation wage adjustment. This would place increases significantly above where inflation is expected to be.

This would be especially costly for the National Treasury, since public sector unions are demanding 10% salary increases. If executed, such an increase would wind up being twice as high as the predicted rate of inflation.

Absa stated that there is just no place in the budget for such “unplanned” spending.

“The MTBPS pencilled in a mere 1% uplift in the envelope for public sector compensation, implying a 0% cost of living adjustment, with the uplift in the overall pay envelope mostly reflecting automatic pay progression.

“We believe the NT is likely to follow the same approach in the Budget – i.e., pencilling in no wage adjustment – so as to set a low base from which to commence wage negotiations with unions.

“Ultimately, of course, the government and organised labour are likely to settle higher. Even last year, when negotiations were deadlocked, the government imposed a 3% pay hike on top of the 1.5% automatic pay progression,” the bank said.

Absa economists forecast a 5.5% all-in increase in public sector pay for FY23/24, as public sector unions try to recoup at least part of the real income loss incurred over the last year as a result of the below-inflation wage adjustment. This would place increases significantly above where inflation is expected to be.

But, the bank noted that, all else being equal, each percentage point increase in public sector pay adds around 0.1% of GDP to expenditure and the deficit.

“In the MTBPS framework, there was no unallocated reserve in FY23/24 that could cover a reasonable wage increase – just a R6 billion contingency reserve.”