South Africa targets slippery wage bill amid debt default risks

The South African government is eyeing urgent cost-cutting across all departments in a bid to reign in runaway spending and a potential debt default.

According to the country’s Treasury, deep cost-cutting to all government departments will target the civil servant wage bill which has been cited as the single biggest load on the annual budget.

The government says it has 1.3 million employees, making it the biggest employer in the country. Yet despite external and internal pressure to reduce the public wage bill, union allies and political pressure on the ruling African National Congress (ANC) has meant that a severe personnel cut-back, as needed, has not been undertaken, nor seem possible.

Many states, including the United States, run budget deficits.  But for South Africa, the deeper question is whether its economy is strong enough to grow out of the hole into which it has fallen, especially post-Covid-19.

South Africa’s fiscal deficit for 2023 is set to be between 6 and 6.5 percent of gross domestic product (GDP). This is much higher than the Finance Minister’s expected 4 percent.

In his budget presented earlier this year, Finance Minister Enoch Godongwana said the government wants to stabilise S Africa’s debt at 70 percent of GDP.

But that figure has already increased to over 72 percent. It is still growing. Some economists suggest it could get worse over the next several years, closing in dangerously to a sovereign debt default.

Sovereign debt is similar to personal debt, with – when loan repayments cannot be met – negative outcomes are quick to follow. Generally, with developing economies, the ‘debt cliff’, the point at which the cost of repaying old debts overwhelm the country’s ability to service such debts, is around 70-80 percent of GDP, depending on current and projected growth.

In the current global environment, with high inflation and therefore higher borrowing costs, the repayment costs escalate while, in the case of South Africa, revenues are not keeping pace sufficient to pay both lenders and other recurring national obligations, especially the government wage bill.

GDP in S Africa is expected to reach $407.5 billion in 2023, says monitoring group Trading Economics, using global macro models and analysts’ expectations.

This is almost a flat line from 2022’s total national output figure of $405.7 b, which in turn was a significant slide on the 2021 GDP of $418.9 b, that reflecting the recovery from the Covid pandemic’s effects which reduced the 2020 country GDP to just $337.52 billion.

Without substantial economic growth, the South African authorities have not been able to keep pace with inflation plus rising costs of borrowings – and caused a near stoppage by most government workers earlier on the year, when the administration of President Cyril Ramaphosa refused to honour the last of a three-year wage agreement with the major unions representing government employees.

As with the ruling party’s own workers, the ANC-controlled government told its employees that is simply could not afford to pay them their expected 3 percent wage increase this year.

Now, with debt repayments increasing but revenues not, the budgetary shortfall is expected to escalate rapidly not only in 2023, but beyond.

According to the official forecasts, South Africa faces a worsening debt situation –ballooning from a low of just under $80 billion in 2006 to over $287 billion in 2022, rising to $328 billion by 2025.

The clear trend in Pretoria’s current expenditure is that South Africa will within a few years be on the edge of a debt trap from which it cannot escape.

This year, London-based lender HSBC expects a deficit of 5.1 percent of GDP in the South African economy, while ratings agency Moody's estimates it could reach as much as 5.6 percent, well above the 4 percent target and planning assumptions behind this year’s national budget.

How South Africa got into the current fiscal jam it finds itself in is a function of deteriorating economic performance over the last 15 years, much exacerbated by rampant corruption in Jacob Zuma’s presidency between 2009 and 2018, and severely aggravated by the Covid pandemic, which hit the S African economy especially hard.

To address the growing problem, the S African Treasury said the government would “stabilises debt through a combination of reforms that boost economic growth, and measures to increase revenue collection and lower expenditure”, these being the classic methods of reigning in runaway government expenditure.

But in South Africa, those ideas are hard to implement, partly due to S Africa’s sovereign debt being already scored very low as what is termed ‘junk status’, according to international ratings agencies like Moody’s, with these bodies seeing no obvious route to short-term rectification of the situation.

And then there is the problem, for the ruling ANC, that its significant union partners, plus other union bodies representing government workers, are saying they will not accept another default on promised increases, and certainly will not tolerate a total government wage bill cut of 10 percent, as generally considered necessary by entities such as the World Bank.

Out of patience, the government’s employee union bodies were this year demanding a 10 percent increase, with a housing allowance and bursary schemes for their children, among other requirements, threatening a complete stoppage of government activities if not agreed to.

With some unions refusing even to negotiate with the government after its “bad faith” refusal to meet its previously-agreed 2023 obligation to workers, the majority in the Trade Unions in Council member unions eventually agreed on a multi-term arrangement for the 2023/24 and 2024/25 financial years, with an average salary increase of 7.5 percent for public servants for the current year.

But while unions only grudgingly accepted that outcome, the increase is still going in the opposite direction of what has been called for, in order to reduce borrowings and close the gap between revenues and expenditure.

Rather than shrinking, the government wage bill has risen from 4.4 percent of GDP in 2010 to 5.1 percent of GDP in 2019, before surging to 7.9 percent of GDP in 2022, a level not seen since the early 1990s.

According to the International Monetary Fund (IMF), global growth is projected to fall from an estimated 3.5 percent in 2022 to 3 percent in both 2023 and 2024.

This means S Africa will be trying to rectify its economy against the background of a globally weakening fiscal environment, which is no easy task.

While the IMF’s forecast for 2023 is modestly higher than predicted in the April 2023 World Economic Outlook (WEO), it remains weak – and S Africa’s prospects, therefore, for a return to budgetary balance, or even a surplus, remains necessarily a long way off, with much trouble water yet to traverse.