South Africa

South Africa’s budget under strain after pay increase offer

South Africa’s government has offered public servants a 7% pay increase for the next financial year, more than was provided for in the February budget, complicating its efforts to rein in debt.

While labour unions are due to table a formal response to the government’s proposal on Friday, the 235,000-member Public Servants Association has already rejected it and wants 8%. The central bank expects inflation to average 5.4% this year.

While the budget didn’t preempt the outcome of the ongoing pay talks, any settlement that hasn’t been provided for “will require very significant trade-offs in government spending because the wage bill is a significant cost driver,” the Treasury said in an emailed response to questions on Thursday.

It reiterated its commitment to reducing the budget deficit and ensuring fiscal sustainability was maintained.

Compensation accounts for almost a third of state expenditure and is crowding out spending on other priorities. Ratings companies have flagged the wage bill as an ongoing risk to the fiscus.

Cost of Increase

According to the Treasury, increasing pay for public servants on salary levels one to 12 by an average of 7% would cost R35.8 billion in the upcoming financial year.

The budget review released last month envisioned the compensation bill growing by an annual average of 2.1% over the six years through March 2026, down from 7.3% over the previous five-year period.

“Although the 2021 public‐service wage agreement was higher than the budgeted amount, it consists of a cash gratuity rather than a permanent adjustment of salaries,” the Treasury said in the review.

The latest increase offer was calculated off a base that excludes the R1,000 monthly gratuity, according to economists at Absa.

That means “4.2% of the 7% would be the rolling of the cash gratuity into pensionable pay while the remaining 2.8% is a nominal increase,” the economists said in a research note on Thursday.

“The wage bill uplift for the upcoming fiscal year was always likely to be much higher than the 1.5% rise that the National Treasury pencilled in for consolidated public sector compensation” in the budget, they said.

The government unilaterally implemented 3% increases in the current financial year after wage talks with labour groups broke down, triggering a strike by the National Health and Allied Workers Union.

With elections due to take place next year, the governing African National Congress may be loathed to further alienate the unions, which have traditionally helped it mobilize support.


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