A higher than inflation salary increase for the public sector against the growing mountain of losses recorded in Company tax returns, does not signal an urgency for effective governance and economic stability to change from an environment where crime offers better returns than business. Important players in Government (and the ANC) appear not to grasp decisions and actions have systemic consequences.
South Africa’s public service salary bill consumes, according to Prof Jannie Rossouw of Wits Business School, about 45% of tax revenue. A 2017 OECD report found South Africa’s public service wage bill exceeded 14% of GDP: substantially higher than the benchmark of OECD and Emerging Market countries.
When factoring in Eskom’s 48 000 workers, Transnet’s 31 000, the almost 8 000 of the Post Office and all those at the other almost 170 State owned enterprises, public sector employment costs would be closer to 16% of GDP.
Add to this the 17 million plus social grants (recipients effectively on a public sector “pay roll”) and it is clear that the bulk of tax money is going to paying people.
In contrast, little effort is made to improve the business environment. SARS data show companies submitting losses increase rapidly whilst those with assessed taxable income, are levelling off. In the years of the Zuma administration, SMEs submitting tax returns (taxable income below R10 million per annum) decreased at an average rate of 31/week. Since the growth in large businesses was less than this decline, they probably went out of business.
Despite these constraints on taxable income, Government offered (and some public service unions accepted) an increase between 6% and 7% with an inflation plus 1% increase for two subsequent years. (The unions’ demand was for increases from 10 – 12%).
This makes one quite cynical about Government’s commitment to limit and even decrease the public sector’s burden and it rings as hollow as the Zuma administration’s repetitive commitment to fight corruption. It simultaneously undermines the weight one can attach to Ramaphosa’s commitment that Expropriation without Compensation (EWC) will not harm the economy.
The salary increase is simply not sustainable in a country of low growth, junk credit ratings and growing unemployment. It increases the opportunity tax that the civil service is on the economy. Add to this the low yields of the civil service outcomes and it’s evident South African taxpayers get a raw deal for the taxes they pay. They deserve better than:
- Paying a large percentage of the public service wage bill to a Police force that have criminals more comfortable than ordinary citizens. The police force is one of the 20 worst in the world and the cost of crime for business the 5th highest in the world.
- A public school system largely held hostage by SADTU with South Africa firmly entrenched in the bottom concerning learner proficiency in mathematics and science.). Learners in independent schools performed well, but those at no fee schools were worst affected.
Since December when Cyril was elected by a whisker, I had several exchanges with a consultant who is assessing post-Brexit strategies for London based firms. The Zuma South Africa was not even considered by him and he focused on Rwanda, Ethiopia, Botswana and Mauritius. Cyril’s victory rekindled some interest: was this the promising dawn?
Exchanging views this week on the investment climate in South Africa, he described the salary offer as “another road sign in the wrong direction”. He described Ramaphosa’s style as one of trying his utmost to pertain ANC unity by a process of appeasing his internal opposition within the ANC. “He got elected through deal-making. Leadership, however, requires more.”
In December, he mulled over several promising aspects in Cyril’s New Deal manifesto, but the State of the Nation Address triggered questions: “Beautiful sound bites, but less substance for an investor than the promise of a Harley Davidson for a dung beetle”. The Budget and Parliament’s decision on EWC recorded further dots on a downward line. After the budget speech, he said: “The acid test will be the Public Service wage negotiations. If there’s spine, there’s still some hope.”
The announcement of the higher increase than inflation (now below 4%) was, together with the growing EWC-momentum (he refers to EWC as The Big C), for him detrimental for investment prospects. “The growing public service salary bill will not help with restoring investment confidence. In fact, it’s an Exocet.”
In the Falkland War of 1982, the Argentine sank several British ships by launching Exocet missiles. The picture below shows the end of HMS Antelope when an attempt to defuse an undetonated Exocet missile failed.
“Was he afraid of a public sector strike? In several departments, the unions can do less damage when on strike than at work. It is difficult to bribe someone or to siphon off money when not in office. With his reputation as a negotiator, why did he blink? Unity of the party was evident in his embrace of the Big C, his compromise on the Cabinet and in his soft-handed dealings with the Northwest situation. Good policy and effective state delivery seems to be of less importance than internal party manoeuvrings. Cyril is more of a Chamberlain than a Lubbers.”
As Chamberlain is notorious for his futile efforts at appeasement that actually fuelled Hitler’s confidence, Lubbers – whose death in February this year went fairly unnoticed in South Africa – is known for restoring growth to the Dutch economy. (As London-based correspondent for Naspers in 1982 & 83, I attended three press conferences of Lubbers in The Hague when working at Nieuwspoort, the parliamentary press gallery.)
Lubbers became Prime Minister of the Netherlands in October 1982 shortly after the September elections that saw the formation of a government by the CDA (Christian Democrats) and the VVD (Liberal Party). The Dutch economy was after years of mismanagement by first the Labour Party (PvdA) and then the indecisive Van Agt CDA-government collapsing with unsustainable public service wages and social benefits. The previous coalition collapsed because of a dispute within the CDA whether there should be a wage freeze for the civil servants or not.
When Lubbers took the reign, he said “I’m here to govern”. He announced a freeze for public sector salaries. “Holland is ill,” and he treated the illness of overpaid civil servants and over-subsidised recipients of welfare grants by capping their benefits. He argued that it was not unacceptable to pay civil servants who do not experience any market risk, more than their private sector peers. Generous disability and unemployment benefits were also fiscally unsustainable: too many people were so cushioned that they did not actively seek employment.
Lubbers forced through a year’s freezing of public sector salaries, then a 3% cut, followed by another year of salary stagnation. A massive public service strike followed, but Lubbers stood firm. He won the subsequent general election with an increased majority for his coalition with the liberals.
These decisive reforms triggered 19 years of unbroken GDP growth. Lubbers served as Prime Minister for just under 12 years – the longest stint ever in the Netherlands.
Not possible in Africa? In Botswana Ian Khama froze the salaries of the civil servants for three consecutive years. When they thereafter demanded a 16% increase, he offered 5%. A massive strike followed. Khama argued that one could not spend 40% of the budget on the salaries in the public sector and carried the day.
The warnings about the bloated SA public service have been voiced by the IMF, the OECD, the World Bank and several local analysts. These apparently fall on deaf ears.
Getting the economy growing again requires a scaled down government that spends tax money in more productive ways than being an employment agency. Government’s task is the protection of and service delivery to all its natural and juristic persons, not to render comfortable employment to itself (the largest Cabinet in the world with 35 ministers compared to Germany’s 14 , the 15 in the US and 17 in the case of Japan) and 2 million privileged civil servants.
Having to borrow in order to pay these salary bills (with tax payers footing also the interest bill) is adding insult to injury.
PS The consultant said using nice phrases to disguise ugly concepts will not bluff potential investors. The Big C? Confiscation.