Economic Watch

Public sector wage demands pose major economic threat

NEHAWU holding budget to ransom

Should only the biggest trade union in the public sector have its way with pay increase demands, the contingency of this year’s national budget will be wiped out before the end of the month.

Minister of Finance, Nhlanhla Nene, in his budget tabled on 25 February, made provision for a contingency of R5 billion.

If only 1% of the 8.4% more than the budget’s wage provision of 7.7% demanded by the National Education, Health and Allied Workers Union (NEHAWU), is acceded to, it will wipe out the contingency.

Besides leaving the national household vulnerable in a highly unpredictable global economic environment and in the face of very tough agricultural conditions, with the implication of likely domestic food shortages, it will also increase budget deficits.

And it is exactly that contingency that NEHAWU, the largest union among the about 1,3 million national and provincial civil servants, has set its eyes on.

The union said in its reaction to the budget that it hoped plans to set aside unallocated contingency reserves of R5 billion in the coming year, R15 billion in 2016/17, and R45 billion in 2017/18 indicated "the employers' sincerity and flexibility" in the negotiations.

Last week another one of the larger public service unions, the SA Democratic Teachers’ Union (SADTU), said government should “present a real offer”. It also wants the wage negotiations to be concluded by the end of this month.

At the end of the previous week the Congress of South African Trade Unions’ (COSATU) chief negotiator, Mugwena Maluleke, reportedly warned that a strike was likely if no progress is made in the negotiations.

At the time of the tabling of the budget National Treasury noted that the national and provincial salary bill rose by 17% between 2006 and 2009 – despite spanning the period of the global financial crisis. It has allocated R470.6 billion for compensation in 2015/16, providing for an average wage increase of 7.7%, or 1.1% above the offer of 6.6% presently on the table.

The unions are demanding an increase of 15%, a massive 112% more than the present offer by government and three times more than the inflation rate.

What will be happening on this front will be closely watched by international credit rating agencies – one of which, Standard & Poor's, already said: “If we were to see a wage agreement that would alter the trajectory in terms of budget deficits, that would be a real concern for us.”

It would seem as though some very tough negotiations between now and the end of March lies ahead in the Commission for the Remuneration of Public Servants.

In a statement on 1 March the National Executive Committee (NEC) of SADTU complained about the slow pace of negotiations: “President Jacob Zuma announced he would establish the commission in his state of the nation address in 2013 and it was formed in August of that year. More than 18 months after its establishment, the commission has invited stakeholders to a meeting on the 11th of March 2015, to introduce itself and its methodology. We call on the commission [to] move with the necessary speed to finalize its task.

“While wage negotiations continue, the NEC expressed the fact that they were taking too long and hoped they would be finalized by the end of March.”

Discouraging signs

In his budget, minister Nene kept the public sector wage bill at around 40% of government’s operational non-interest expenses and appealed to the public sector to be reasonable in its demands. The first reaction from the unions in the sector has not been too encouraging.

Developments around the public sector over the past decade have increasingly become unsustainable. The unit labour costs for the public sector – which is the largest single employer in the country – have rocketed by 80% in the past decade, even if inflation is taken into account. The annual average growth rate has been more than 6% above inflation over the same period according to Treasury figures.

Without a compromise in the negotiations over the next week or two, the impact on the South African economy, social and financial stability is likely to be extremely negative.

It could sink minister Nene’s fiscal consolidation strategy and South Africa’s investment-grade credit rating could be compromised. Social services (including education), already under rolling protest pressure, could be disrupted.

According to the Budget Review it will also force government to cut back on capital spending, critical priorities may be affected, and public sector employment may be trimmed back.

The latter will undoubtedly invite more opposition from labour unions. If the government refuses to budge beyond the 6.6% figure, a paralysing public sector strike – which could include municipalities where separate but similar wage negotiations are under way – is very likely.

As things stand, the public-sector wage talks pose the biggest immediate threat to government finances, the country’s investment-grade credit rating, social stability and economic growth prospects.  

by Piet Coetzer & Stef Terblanche

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