Helen Zille: Election year – Enforced budget cuts. Salaries or Services?

Last week Western Cape Premier Helen Zille spoke about the need, and desire from government, for urgent and far-reaching budget cuts. Finance Minister Pravin Gordhan drove this point home after he said budgets would at least for the next three years be harshly pruned, even asking for money suggestions. It was a story compounded by elements of corrupt activity where she was alerted to an incident in the Beaufort West region where local government was caught calling for an injection of funds, and asking for control over procurement processes, to help drive the election campaign. This despite the call for urgent budget cuts. Below she refers to implementing these budget cuts. The problem arises that there’s a budget shortfall now, as wage negotiations were finalised prior. It’s a problem that leaves little alternative as the only option is to really lower the agreed upon increase of 7.2 percent. It’s a tough call but Zille says it’s time for South Africa’s bloated (and well paid) public service to understand that there is really no viable alternative? It’s an interesting read, that taps into the complexities of managing a province. And let’s not forget that 2016 is an election year. – Stuart Lowman

By Helen Zille*

Last week I called a Special Provincial Cabinet Meeting. This is something we only do in extraordinary circumstances, usually signalling a major challenge or crisis.

We discussed the outcomes of a meeting I attended the previous week in Pretoria, chaired by President Jacob Zuma, where Premiers were told in plain language that urgent and far-reaching budget cuts are needed.

National Cabinet has resolved that money committed to National and Provinces for the new financial year will be substantially cut across the board, the detail of which will be shared in Minister Gordhan’s budget speech. For the Western Cape this would require substantial budget cuts, running into hundreds of millions of Rand, over the next three years in order to balance the budget.

If we are to apply it in the way National Cabinet has suggested, it will have a major impact not only on our ability to spend on infrastructure, but also on personnel. As a minimum we will need to freeze appointments in vacant posts, and significantly scale down the number of new posts, including teachers, to serve our rapidly growing population.

To understand how we arrived at this point, we need to return to the last round of public sector wage negotiations between the Public Service and Administration Department (DPSA) and public sector unions.

As far as we know the DPSA had been given a mandate from National Cabinet that the total negotiated amount could not go above a fixed threshold and in the Western Cape we budgeted, on Treasury’s budget estimates, for a maximum increase of 5,5%.

We took the additional precaution of warning the DPSA, in writing, that we could not afford more than the budgeted increase National Treasury had projected.

However, despite our “warning” and their mandate, the DPSA’s negotiating team succumbed to pressure from the unions and settled on a 7.2% increase for 2016/17. Together with the increased housing subsidy and medical aid, the overall increase amounts to more than 10%.

Different spheres of government were simply expected to fund the difference from within existing budgets.

After learning of this decision, I wrote to the DPSA Minister at the time, the late Collins Chabane, to set out our concerns about the unmandated agreement.

The citizens of the province would have to suffer because of an unmandated agreement reached on the basis of money that was never available.

Which begs the question: how was it possible for the DPSA negotiators to concede to the demands, knowing the full implications of their decision, which had been pointed out to them by us in writing prior to the commencement of the negotiations?

Faced with the challenge of having to find money to implement an agreement we could not afford, we approached National Treasury to foot the bill for the unbudgeted R1,249 billion increase to our wage bill for 2016/17 alone (without counting the enormous additional amounts for the carry-over in subsequent years).
National Treasury appeared to appreciate our position and informed us that the shortfall we (and other provinces) would incur as a result of the decision, would be made up from the government’s contingency fund, established by National Treasury for unforeseen circumstances that might occur.

Read also: Investment ratings: Moody’s optimistic on debt but wage bill needs restraint

While this did not remove the concern we had raised over the wage negotiation process, it alleviated the need to pursue remedies to make up our budget shortfall.

However in our recent meeting in Pretoria, it was made very clear that Cabinet has now decided we will face further cuts because there is simply no money to give us.

In explanation of this “about turn” we were informed that a new crisis had arisen due to national government’s chronic under-funding of Higher Education over many years, which, together with the general state of the economy, means that the money promised to us by National Treasury to cover at least a portion of the un-budgeted public sector wage increases must be reprioritised for payment elsewhere.

My response was simple: If this is the case, we cannot afford the salary increase of 7,2% and must revert to 5,5%. Surely everyone employed in South Africa’s bloated (and well paid) public service will understand that there is really no viable alternative?

But 2016 is an election year, and the national government has to keep the public sector unions (the only ones still loyal to the government) on-side.

Read also: Paul Whelan: 2016 elections – Zuma’s tipping point? Succession concerns.

So we were told that, despite the withdrawal of the additional funds, the wage increases would go ahead, and we would have to make up the savings elsewhere. We were back to square one.

In a sleight of hand, the National Government said they were still giving us the money they had promised in order to make up the salary shortfall, but were simultaneously withdrawing a commensurate amount from other budgets, because “priorities had changed”.

No matter what fancy words are used to describe the impact of the cabinet’s decision, the fact remains that prior to the wage agreement being signed, the Western Cape Government did not have a shortfall in its budget; after it was signed we had a shortfall of about R3 billion over the next 3 years.

As an autonomous sphere of government, we must, by-and-large, be able to set our own priorities within national policy frameworks. It is impossible to justify inflated salary increases at this time on the basis of the National Development Plan, which is the key national policy framework to which we are committed.

The implications of this directive are dire, and Treasury suggestions have included the rationalisation of our current work force — which is code for “retrenchments”.

For a provincial government that has tried its level best to implement good policy decisions, cut costs and manage our budget well, this is a bitter pill to swallow.

We achieve clean audits when millions go to waste in other provinces and bankrupt state-owned enterprises.
Our expenditure on personnel as a percentage of the budget, is the lowest in the country, at 53,2%, compared say to Limpopo’s 72,9%.

But when budgets are cut, there is no distinction between good governance and bad.

Whilst any budget amendment needs to follow a legislative and consultative process, there seems to be little doubt that Cabinet regard their decision as final and binding. And so last Wednesday, my Western Cape Cabinet colleagues and I set out to explore the various options at our disposal.

We are mindful that this is not a static crisis. Economic growth is slowing, now predicted to be just 0.7% this year, the Rand has plummeted against international currencies on the back of the firing of a Finance Minister, and we are perilously close to being downgraded to junk status with credit institutions whose opinions matter.

This means potential investors will be wary of doing business with us, while the cost of national government borrowing from elsewhere will be much higher than at present.

Quite how mega projects like the National Health Insurance and Russian Nuclear Deal (to which President Zuma remains committed) will be funded is incomprehensible.

At this stage, we identified three options at our disposal:

  • To get the DPSA 7.2%  wage increase agreement set aside or reversed so as to ensure that it aligns with the mandate and the allocation provided to us for this purpose by the National Government; or
  • To insist that National Treasury provides the shortfall in funds. This will mean key policy decision changes by National Government; or
  • To take the option presented to us by the Presidency in Pretoria and initiate the process of “rationalising” our public service so as to ensure we have enough money to continue frontline service delivery and pay our remaining employees their increased salaries every month.  This may make sense in other provinces, but in the Western Cape (by and large) we are not over-staffed.

These three options will now be interrogated further.  It would make the most sense if we could all revert to the affordable 5,5% increase which Treasury endorsed. This would be in the best interests of citizens and service delivery.

Sure, it will require a small sacrifice by people who are already privileged merely to have a job in these times of mass unemployment. It is time to make this small sacrifice in the interests of the country.

  • Helen Zille is the Premier of the Western Cape

South Africa to Make Deep Budget Cuts, Provincial Leader Says

By Paul Vecchiatto

(Bloomberg) — South African President Jacob Zuma told provincial leaders that the government will make deep cuts to budget allocations in the coming fiscal year, requiring spending curbs on personnel and infrastructure, Western Cape Premier Helen Zille said.

Zuma convened a meeting in the capital, Pretoria, two weeks ago “where premiers were told in plain language that urgent and far-reaching budget cuts are needed,” she said in an e-mailed statement on Tuesday. “Cabinet has resolved that money committed to national and provinces for the new financial year will be substantially cut across the board.”

Finance Minister Pravin Gordhan, who will deliver his budget plan on Feb. 24, is seeking to avoid a credit-rating downgrade to junk in the face of plunging commodity prices, weak demand from China and the worst drought in more than a century. While a slowing economy has prompted the government to put a cap on spending growth, it has so far avoided expenditure cuts.

Phumza Macanda, a spokeswoman for the Treasury, said Zille had been given confidential information and it was regrettable that it had been made public.

Gordhan “is already on record that we’re in a tough fiscal environment and that we will continue in the path of fiscal consolidation to demonstrate our credibility,” Macanda said in an e-mailed response to questions.”

The World Bank on Tuesday cut this year’s growth projection for South Africa to 0.8 percent and said the economy is at risk of falling into recession. The government had pledged in October to narrow the fiscal deficit to 3.3 percent of gross domestic product in the year beginning April 1.

Zille said the Western Cape will be required to make “substantial budget cuts, running into hundreds of millions of rand” over the next three years. That may affect the province’s spending on infrastructure projects and salaries, she said.

Additional funds that the National Treasury had earmarked to provinces to cover above-inflation wage increases will now be diverted to other spending items, Zille said. The government last year awarded civil servants pay raises of 7.2 percent compared with original budgeted estimates of 5.5 percent.

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