South Africa’s financial future on the line

The public sector wage bill, currently under negotiation, poses the biggest threat to the government’s financial health, with years of fiscal consolidation at risk of being undone. 

South Africa’s finances have shown signs of gradual improvement in recent years, with the National Treasury’s plans to contain government spending paying off. 

This has culminated in the government posting its first primary budget surplus in 15 years in the past financial year. 

A primary budget surplus enables the government to begin paying down its debt, as it collects more tax revenue than it spends on providing services. 

This is a significant step on the government’s journey towards lowering its debt pile and reducing debt-servicing costs to free up capital to spend on growing the economy or social services. 

The government also has the potential to enter into a virtuous cycle, where a growing economy produces more tax revenue for it to further pay down debt and free up additional capital. 

While the future for the South African economy and its finances looks much brighter than it did a year ago, one looming threat remains – the public sector wage bill. 

Nedbank economist Isaac Matshego said significant increases to this bill have the potential to substantially raise government spending and the Treasury’s fiscal discipline. 

Matshego explained that it is also the most difficult budget item to predict as it is only updated annually, with no indication given during the year as to whether the government is containing costs in this area. 

The only indication economists can work from is the National Treasury’s estimates and demands from unions, which are often vastly different. 

While the government expects to contain any increases, Matshego casts some doubt on this, as universities are demanding huge increases. 

The National Treasury expects to be able to keep expenditure growth contained at around the headline inflation rate, between 4% and 5%, for the next three financial years.

However, Nedbank expects expenditure to surge 6% in the 2025/26 financial year as the new wage agreement is implemented. It does not think unions will accept an inflationary increase. 

This will, in turn, ensure the National Treasury misses some of its financial targets for the 2025/26 financial year, with debt-to-GDP surprising to the upside and its deficit remaining stubbornly wide. 

Nedbank’s forecast is also based on the fact that the government has failed in the past two years to keep the growth of the public sector wage bill below the National Treasury’s expectations, as shown in the graph below. 

The government’s negotiations with public sector workers have not gotten off to a good start, with the two sides’ initial offers and demands being far apart. 

The Public Servants Association of South Africa, representing around 242,000 workers, initially demanded a 12% pay increase. This would require an additional R140 billion in government spending. 

This demand was flatly rejected, with the state offering a 3% pay increase at the Public Service Co-ordinating Bargaining Council in September. 

It also told labour unions representing state workers to “go and reconsider and relook at the position, and at the demands, in terms of where is it we can maybe follow a different approach”.

The Public Servants Association of South Africa, which represents about 242,000 workers, rejected the state’s counteroffer. 

In addition to the 12% increase in the 2025-26 financial year, public servants are seeking a R2,500 increase in their housing allowance. They’ve also called for a danger allowance to be raised to R1,000 from the R597.

Granting such a large increase has implications for the state’s finances and threatens to raise inflation in South Africa. 

The ongoing strength of South African trade unions tends to keep the overall wage increase at or above the top end of the inflation target. 

At the same time, the country continues to struggle with declining levels of productivity, which undermine the country’s competitiveness, adding a layer of costs that companies are constantly trying to recoup.

As increases are not combined with a corresponding rise in productivity, upward pressure is placed on inflation. 

Stanlib economist Kevin Lings identified this as one of the three biggest threats to deep interest rate cuts in South Africa. 

He expects rates to remain above pre-pandemic levels due, in part, to consistent above-inflation increases in wages.