These three words could very well be a collective description of the many ills of the South African economy, and are at the very heart of an impending economic disaster, which is attributable to government policy. It was eluded to in last week’s column.
A recent Reuters headline screamed: ‘Why South Africa’s public wage bill is a problem’. But I am afraid it is not, as the word ‘problem’ is defined as an unwelcome or harmful situation. The current situation is anything but that; in fact, it’s a full-blown crisis. The article offers an array of numbers that offer insight into the bloated, unsustainable and unaffordable nature of the public wage bill. For the 2020/21 fiscal year, government plans to spend about R639-billion on the salaries of its 1.3-million-strong workforce. What the article does not say is that the wage bill accounts for 51.4% of government revenue (according to Africa Check) and that the average yearly salary is R491 538. The article stated that spending on public-sector salaries more than tripled between 2007 and 2019, rising more than 40% in real terms over the past decade. In case you glossed over ‘real terms’, it means that the salaries were adjusted to account for the effects of inflation. Unsurprisingly, South Africa’s public-sector salary bill accounts for a greater share of government spending, compared with many advanced and emerging economies.
But this does not offer the full picture. An Eyewitness News article published on the same day as the Reuters one stated that, over the past 15 years, public-service compensation spending grew at an unsustainable rate, which is almost 1.5 percentage points faster than the gross domestic product growth rate. According to Statistics South Africa, public-sector compensation has grown way faster than salaries in the private sector over the past decade. National Treasury documents reveal that 95% of public servants earn more than the bottom 50% of taxpayers and those employed in the private sector. Ponder that for a moment.
According to Finance Minister Tito Mboweni, “over the past five years, public-sector employee compensation grew by 7.2% a year on average – well above inflation”. The rapid rise in salaries, coupled with an increase in headcount, has pushed up government’s wage bill by 50% since 2008. According to Reuters, “the main reason was above-inflation wage deals with powerful unions, which are allied with the African National Congress and can shut down parts of the economy if they don’t get their way”.
So, with the South African economy in ‘Recession Square’ – four quarters of negative growth – what should government do? Should it not heed the adage “neither a borrower nor a lender be”? The South African government has borrowed from the International Monetary Fund (IMF) and is now pursuing a loan from its sister organisation, the World Bank. Fortunately, or unfortunately, depending on your point of view, government cannot borrow from the World Trade Organisation, which, along with the aforementioned organisations, forms the trilogy of the Bretton Woods institutions.
A News24 article published on October 24 quotes Mboweni as saying that a R70-billion loan from the IMF would be used to fund government programmes, “which could include salary payments”. Borrowing to pay salaries!
Further, a Bloomberg article published on October 27, which was titled ‘World Bank talks with South Africa stall over State company bail-outs’, quotes an unnamed source as saying that “World Bank officials have told South Africa’s government it will need to reduce its wage bill to secure a loan and that it doesn’t want the money to be used to bail out insolvent State companies”.
Incurring debt comes at a financial cost. According to Africa Check, the public wage bill and debt repayments combined gobble up 72.4% of tax revenue. This has the making of a perfect economic storm.