South Africa’s government has announced plans to slash its public sector wage bill, setting President Cyril Ramaphosa on a collision course with the country’s powerful trade unions as he seeks to fix the biggest ever fiscal deficit in the post-apartheid era and avoid another ratings downgrade.
Tito Mboweni, Mr Ramaphosa’s finance minister, said in a budget speech recently that the state plans to cut 160bn rand ($10.5bn) from civil-servant pay in the next three years in order to halt a rapid rise in public debts between 2020 and 2021.
Cutbacks to pay rises and promotion increases were part of “a major step towards fiscal sustainability”, Mr Mboweni said, as stagnant growth, falling tax revenues and repeated bailouts for state-owned enterprises threaten to sweep away South Africa’s last investment-grade credit rating.
Moody’s could downgrade Africa’s most industrialised economy to junk status as soon as next month with government debts look set to surge to two-thirds of gross domestic product between 2020 and 2021.
In his comments further, he noted: This fiscal year’s budget deficit will reach 6.8 per cent of GDP, the widest fiscal gap since the end of apartheid. The economy is likely to grow less than 1 per cent in 2020, according to official forecasts. “The numbers show that we have work to do,” Mr Mboweni told members of parliament.
South Africa’s treasury is having to squeeze state spending to find funds to avert defaults at Eskom, the blackout-prone electricity monopoly, and the national airline, South African Airways.
South African stocks and government bonds rallied and the rand gained 0.49 per cent against the US dollar after Mr Mboweni’s budget.
The treasury said the target for wage cuts could be achieved “through a combination of modifications to cost-of-living adjustments, pay progression and other benefits.”
Cosatu, the country’s biggest labour federation and member of the African National Congress party’s ruling alliance, had already called any move to review public wages “a declaration of war”, setting the stage for a bruising battle between trade unionists and the ruling party.
The politically unaligned Public Servants Association immediately criticised Mr Mboweni’s plan. Members’ salaries were “not for sale to address a deepening crisis that was brought about by widespread inefficiencies and a lack of urgency to deal with corruption and recover such funds,” it said.
More than a third of South Africa’s state spending is devoted to wages, representing about a tenth of its GDP, almost as high as levels in Sweden and Norway, according to Capital Economics, an independent economic research consultancy. After inflation, the average South African government wage rose two-thirds in the decade to 2019, Mr Mboweni has said.
Historically, the labour unions have been important supporters for Mr Ramaphosa. In 2018 Mr Ramaphosa, himself a former union leader, relied on Cosatu’s backing to win the battle to replace the discredited Jacob Zuma as head of the ANC.
Despite the mounting fiscal deficit and looming junk credit status, Mr Mboweni also announced the formation of a South African sovereign wealth fund, with plans to raise about $2bn for investments.
The long-discussed plans for such a fund have baffled analysts, given the poor state of the government’s finances, but have become a key goal for the ANC’s leftwing.
Mboweni added: “There are a variety of possible funding sources, such as the proceeds of spectrum allocation, petroleum, gas or minerals rights royalties, the sale of non-core state assets, future fiscal surpluses and money we set aside.”
