Wednesday, 28 October 2020
Cape Town: In an effort to stabilise the spiraling public sector wage bill, Finance Minister Tito Mboweni has announced that National Treasury will propose a three-year wage freeze.
The proposal is contained in the Medium Term Budget Policy Statement (MTBPS) the Minister delivered in Parliament on Wednesday.
About R36.5 billion has been reduced from the compensation of employees, mainly from a freeze in salary increases.
In supporting documents, Treasury said government proposes growth in the public service wage bill of 1.8% in the current year and average annual growth of 0.8% over the 2021 Medium Term Expenditure Framework (MTEF) period.
“To achieve these targets, which are essential for fiscal sustainability, government has not implemented the third-year of the 2018 wage agreement.
“Furthermore, the Budget Guidelines propose a wage freeze for the next three years to support fiscal consolidation,” reads the MTBPS document.
Additional options that are also set to be explored include harmonising the allowances and benefits available to public servants, reconsidering pay progression rules and reviewing occupation-specific dispensations.
The next round of wage negotiations is due to start soon and work is underway to formulate government’s position.
In addition, government is coordinating work relating to developing a comprehensive public sector remuneration strategy for the medium- to long-term. This will include public office bearers, State-owned companies, public entities and local government.
The strategy will seek to better balance competing interests on the basis of fairness, equity and affordability.
Implementation risks for expenditure reductions
Both the upcoming decision on the final year of the current wage agreement and the upcoming wage talks pose significant risks to the expenditure ceiling.
Treasury said government remains committed to fiscal sustainability.
In light of the weak economic outlook and deteriorating fiscal position, the 2020 MTBPS sets out ambitious consolidation targets to achieve a primary surplus by 2025/26. This, it said, requires substantial spending reductions, particularly on the wage bill, to stabilise debt and improve the composition of spending.
Achieving these targets will require large reductions in non-interest spending over the next three years, amounting to R300 billion, relative to projections set out in the 2020 Budget Review.
The majority of these reductions will be applied to the wage bill. Government will aim to protect funding for infrastructure investment, the document states.
With the fiscal outlook highly uncertain, Treasury concedes that major risks are posed by the speed of economic recovery, the legal process associated with public service compensation and the forthcoming wage negotiations.
Treasury said public service compensation had, in the last 15 years, grown at an unsustainable rate, at nearly 1.5 percentage points faster than the growth rate of the GDP.
“[This was] largely because of increases in average remuneration. The result is that public service compensation now accounts for the equivalent of 11% of GDP, up from 9% in 2004/05.” said the Minister.
Treasury slashes provincial, municipal equitable share
In an effort to manage the effect of reductions in planned expenditure, relative to the 2020 Budget, the provincial equitable share will be reduced by R209.7 billion in the next three financial years.
The share will be cut by R60 billion in the 2021/22 financial year, R85.6 billion in 2022/23 and R64.1 billion in 2023/24.
“These reductions include compensation reductions announced in the 2020 Budget and in this Medium Term Budget Policy Statement (MTBPS), which account for about 85% of the total, and reductions to conditional grants of R12.1 billion,” said Treasury.
In this regard, Treasury said rural provinces, which are more dependent on transfers from national government, are likely to be more affected than urban provinces with additional revenue sources.
“The current review of the provincial equitable share formula will include refinements to assist in addressing the costs associated with service delivery in rural and urban locations.
“To respond to the planned adjustments to expenditure, all provinces will need to reprioritise and increase efficiency,” Treasury said.
Transfers to local government are expected to be reduced by R17.7 billion, including R14.5 billion from the local government equitable share, R2.7 billion from the general fuel levy and R569 million in direct conditional grants.
Treasury said the majority of municipalities increased wages by 6.3% from July 2020 in line with their existing multi-year wage agreement. The implications of these reductions will be set out in more detail in the 2021 Budget Review.
Additionally, underperforming programmes will be revisited.
“For example, some cities receiving the public transport network grant have not launched their integrated public transport networks.
“Over the MTEF period, at least two more poorly performing cities will be suspended from this grant and the remaining cities will be required to reduce costs and demonstrate their effectiveness to remain funded,” reveals the MTBPS.
Several changes are proposed to the structure of conditional human settlements grants over the medium term.
The title deeds restoration grant will end in 2020/21. The grant established mechanisms, processes and capacity within each province to help eradicate the backlog in providing title deeds to subsidised houses delivered before 2014.
Treasury said funds from this grant will be shifted back into the human settlements development grant from 2021/22, which will in turn fund these eradication initiatives.
Once a province has cleared its backlog, “it can allocate the remaining funds to other projects within the grant”.
Following an allocation in the 2019 Budget, a component within the human settlements development grant and the urban settlements development grant was allocated a minimum amount for informal settlement upgrades, in partnership with communities.
From the 2021/22 financial year, a new informal settlements upgrading partnership grant will be introduced for provinces and metros.
The design of this grant, states the document, incorporates lessons learnt, which include requirements for informal settlement upgrading strategies and planning individual upgrading projects with communities.
“To ensure fair funding allocations to each province, the provincial equitable share formula is updated annually to reflect demographic changes. This formula is under review, in collaboration with Provincial Treasuries, although no changes are proposed this year.” the document reads.