A closer look at the SA public sector wage bill and government’s three options

By Ndivhuho Netshitenzhe*

The year-on-year remuneration for all salary bands in general government has outpaced the average inflation rate by 2 percentage points every year since 2006/07, with the salary of low income earners outperforming high income earners.

IT has become clear that over the last 10 years, compensation of public sector employees has become one of the largest components of government spending. As a percentage of total spending, it accounted for 35.4% of total consolidated expenditure in 2018/19. In fact, public sector compensation spending has more than tripled since 2006/07, increasing from R154.7 billion to R584.7bn in 2018/19. If the salary cost had risen in line with inflation, the cost would have only increased to R312bn, making up only 22.6% of total spending. Worse still, when looking at provincial government, compensation of employees accounted for 59.7% of total spending, a 3.5 percentage point increase since 2006/07.

In 2018/19, spending on compensation of employees grew by over 7% y/y in all provinces, with the highest growth coming from the North West. Limpopo has the most bloated wage bill, with employee compensation making up 68.1% of total spending. This is particularly concerning since this level of spending on wages tends to crowd out other spending, resulting in a deterioration in service delivery. This is why; it is no surprise that Limpopo had the lowest service delivery index scores in 2016, according to National Treasury.

The remuneration for all salary bands in general government has grown by an average of 7.9%y/y every year since 2006/07, with the salary of low income earners outperforming high income earners. This compares with an average inflation rate of 5.9%y/y. The mean income across all salary bands increased from R137,348 in 2006/07 to R415,932 in 2018/19. The ballooning of total compensation was clearly driven by above-inflation increases.

R1m+ earners almost triple in 12 years

However, the increase in personnel over that time exacerbated the problem as more employees received above-inflation increases each year. To put this in perspective, the salary adjustments and increase in personnel resulted in the tripling of the number of government employees earning a salary of over R1 million from around 10,000 in 2006/07 to over 28,000 people in 2018/19.

It is important to note that, more recently, government has made some effort in reducing the public sector wage bill. While they have been unable to reduce the salary increases given the multi-year agreement signed in 2018, government has committed to reducing the personnel headcount (especially in provincial departments) by allowing for natural attrition and early retirement packages. As such, in the last five years, more people have left the public service than have been hired.

More specifically, the number of personnel in public service has decreased by over 15,000 since 2013/14. Given that during that time real average remuneration grew by an average of 2.2% each year, the decrease in personnel means that government saved around R5.6bn (real) during that period.

Read also: SA inflation drops to near 9-year low, opening door for rate cut

While this trend is encouraging, the figures reveal that the vast majority of the decrease in the number of employees came from low salary band positions, which can be regarded as entry-level and junior staff positions. The number of employees in other salary bands (excluding bands 9 to 12) has actually increased during that same period. As a result, the headcount for higher salary bands (bands 9 to 16) increased by a compounded annual growth rate of 7.0% since 2006/07, compared to 0.3% for bands 1 to 8.

It is clear that the decrease in public service employees has taken place in the wrong salary bands. Given that the bloated personnel count in government was driven by a significant increase in higher salary band positions, government should’ve been targeting management positions (junior, middle and top). Furthermore, government hiring since 2008/09 has been concentrated in healthcare; justice (police); and education (teachers) professionals. What is concerning is the fact that the services provided by these departments have systematically deteriorated over the last 10 years, despite the increased resources.

WORLDVIEW: SA has a debt problem. But so does everyone else.

Since the reduction in government personnel headcount has been focused around low salary band positions, government departments have become somewhat top heavy, with a rising number of management and shrinking junior staff. This has resulted in the public sector wage bill remaining elevated despite the progress made in reducing the overall headcount.

When looking at government’s wage bill by salary band (calculated by taking the number of personnel in a salary band and multiplying by the average salary for that band), the cost of compensating employees from higher salary bands, has risen the most. So while the wage bill for lower salary bands is the largest, with a combined cost of R309.7bn in 2018/19, the wage cost for salary bands above 8 had a compound annual growth rate of 15.1%y/y since 2006/07. This was mostly driven by the continued increase in the number of employees in these salary bands.

Tough calls needed

In order to improve government’s employee compensation costs, some tough decisions need to be made. Fortunately, government has a number of options in this regards.

Option one is for government to decrease the headcount of staff across all levels by at least 5% a year. This would save the government around R29.2bn or 4.3% of the wage bill in 2020/21. Over three years, this could reduce the staff headcount by 353,000 and the savings could amount to R185.8bn by 2022/23. While this is probably the best cost-saving plan, it is also unrealistic as it would require government to cut 283,300 lower salary employees and only 69,900 management staff.

Option two is for government to cut management staff by 10% every year for the next 3 years. This could reduce the headcount by at least 136,400, in all management positions, saving around R142.7bn by 2022/23. Given that on average, managers within government departments earn almost three times more than junior staff, government would not need to dismiss as many people to cut costs and it would address the problem of top heavy departments and SOEs. This option is more realistic because it not only has a relatively lower impact on job losses but it is less likely to get a negative response from trade unions that, it can be argued, have been one of the biggest hindrances to more meaningful reductions to the public sector wage bill.

Option three would be for government to contain salary increases by renegotiating the multi-year wage agreement. Government could negotiate for only cost of living adjustments for staff and agree to freeze the salaries of senior management, saving around R14.4bn in 2020/21, or 2.1% of the wage bill. This would send the correct signal to the public and could save government as much as R88.5bn over three years. Combining this with a 10% cut of management staff would increase the savings to R37.1bn in 2020/21 and as much as R159.5bn over three years.

Thus, for government to make a meaningful change to the wage bill, they would need to accelerate job cuts, particularly in management. This, along with salary freezes for top management and cost of living increases (based on expected inflation) for other staff, could make a meaningful dent to the public sector wage bill in the medium term. Government needs bold leadership with the political will to make these tough decisions, something they have not been able to do thus far.

  • Ndivhuho Netshitenzhe is an economist at Stanlib.