9 November 2020

Business Unity South Africa (BUSA) on public sector remuneration in South Africa

As South Africa considers the path towards recovery and the risks the government’s fiscal policy poses to that recovery – the capacity and cost of the state and in particular the public sector wage bill is a crucial factor.BUSA commissioned Intellidex to research various aspects of the public wage bill in SA. They produced a report titled: “The Public Sector Wage Bill-an evidence-based assessment and how to address the challenge.”
The report utilises data released by National Treasury, as well as the Quarterly Employment Survey released by StatsSA, which measures the full public sector.

We will identify the critical findings of the report in this statement. The full report will be made available to members of media present.
The following findings are an indication of the detail in the report:

There is no “optimal” size for a public service. SA probably needs one that is reasonably large because of the socioeconomic issues we need to address. The report finds the SA public service is not large in per capita terms, but unusually well remunerated, when compared to the basket of countries referred to above.

The report shows that public sector wages in SA are higher than the average of 46 countries looked at by the IMF. These ranged from Bangladesh to Norway and Denmark and included countries from Europe, Africa, South America and elsewhere.

Payroll costs in SA are larger than the global norm as a percentage of GDP, public spending, or tax revenues. Public sector wage increases as a percentage of tax revenues has grown from 31% before global financial crisis to 41% in 2009/10, in face of global slowdown, and has stabilised to around 37%. The percentage exceeds 50% of revenues this year and will be 47% next year and 45% in 2022/23.

The average remuneration of public servants in SA is high by international standards and when compared to private sector employees and per capita GDP. Teachers’ salaries, measured in purchasing power adjusted US dollars, are nearly 50% higher than the OECD average.

The IMF data on 46 countries, referred to above, for 2017, shows public sector compensation for national government, provincial government and state entities was an average of 9.4% of GDP. SA was at 11.6% (25% higher than international average) and 15% of GDP in 2019. The report recognises differences in constitutional models, but it is clear that SA has the highest ratio of compensation to public spending, with over 35% allocated to compensation. This is one-third higher than the average of the other countries in the basket, which average at 26.1%.

Compensation spending went up from R154 B in 2006/7 to R518B in 2018/19. This is a 78% inflation-adjusted increase, while increases in headcount went up by 22%. Payroll costs have increased by a compound average of 10.5% since 2006/7, compared to average growth of nominal GDP of 8.2%.

Fastest increases are at bottom of staff distribution.

There is no indication that there are any productivity increases to justify wage increases.

Increase in wage costs from 2006-2019 outstrip the rate of economic growth and productivity.

The Quarterly Employment Survey data indicates that:

Public sector employment has risen by over 18% between 2010 and 2020. In the same period, non-agricultural private-sector employment increased by 27%. The monthly public sector wage bill grew by 136% in nominal terms between 2010Q1 and 2020Q1, representing a real inflation-adjusted increase of over 70%.

The report also makes suggestions on how SA could make progress in addressing this critical issue. The following is pertinent in this regard:
SA needs to address high payroll costs, costs rising too quickly and public sector employment being increasingly unproductive. This is a tough task and will require government, labour and business working together to achieve this.

We need agreement on:

Ratios of payroll costs to GDP and tax revenue that are sustainable and affordable

Timeframes over which adjustments should be undertaken which are credible and fair

That government, trade unions and business will work together to develop productivity reviews and then productivity enhancement plans for the public service to help the public sector deliver on its reform and service delivery agenda

The downward adjustments to the payroll can be made either by reducing wages, reducing headcount, or doing both. These are very difficult decisions, but the country has jumped off the cliff and we need to achieve a soft landing. An essential element of a soft landing is a decrease in the public sector wage bill. If we assume a drop in nominal GDP of 4% this year and increases of 4% in each of the next two years, and we want to decrease payroll costs by 10.5% by 2025/26, aggregate payroll costs can increase by no more than 1.8% a year in nominal terms. This is the hard decision that needs to be made!

BUSA commissioned this work because we are of the view SA needs an objective set of data that can inform engagement between Government, business, and labour on enabling a public service that is sustainable and productive and is remunerated accordingly. The recent Medium – Term Budget Policy Statement has highlighted the importance of addressing the public sector wage bill and engaging social partners on this issue given the perilous state of the government’s finances. We remain committed to this engagement with partners and trust this report will be a critical input to such engagement.

Thank you!
BUSA CEO Cas Coovadia









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