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A closer look at government’s wage bill

 

A closer look at government’s wage bill

Over the last 10 years, compensation of public sector employees has become one of the largest components of government spending, accounting for 35.4% of total consolidated expenditure in 2018/19. In fact, public sector compensation spending has more than trebled since 2006/07, increasing from R154.7 billion to R584.7 billion. If the salary cost had risen in line with inflation, the cost would have only increased to R312 billion, or 22.6% of total spending. Provincial government’s compensation of employees in 2019 accounts for a hefty 59.7% of the total compensation spend.

The chart below shows the breakdown of the provincial wage bill by province:

 

SA provincial compensation of employees spending by province (% of total spending) 2018/19

[1]

Source: National Treasury

 

The highest growth is in the North West. Limpopo’s bloated wage bill is concerning since it 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.

 

Salary increases exceed inflation

The remuneration for all salary bands in general government has grown by an average of 7.9% year on year every year since 2006/07, with the salary of low-income earners outperforming high income earners. This is well above an average inflation rate of 5.9% year on year over this period. 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 and the increase in personnel at the same time exacerbated the problem. More employees were receiving above-inflation increases each year. These above-inflation salary adjustments, coupled with an increase in personnel, trebled 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.

 

Hiring reduced and natural attrition encouraged

Recently government has made some effort to reduce 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 natural attrition and early retirement packages. As a result, in the last five years more people have left the public service than were hired. 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 actually saved around R5.6 billion (real) during that period.

 

Salary bands tell a different story

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. The number of employees in other salary bands (excluding bands 9 to 12) has actually increased during the same period. As a result, the headcount for higher salary bands (bands 9 to 16) increased by a compound annual growth rate of 7% 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. Since the bloated personnel count in government was driven by a significant increase in higher salary band positions, government should have targeted 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.

Since the reduction in government personnel headcount has been focused around low salary band positions, government departments have become top-heavy, with a rising number of management and shrinking number of 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 R309.7 billion 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 decisions required

To improve government’s employee compensation costs, some tough decisions need to be made. Fortunately, government has a number of options.

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 R29.2 billion 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 R185.8 billion 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 three years. This could reduce the headcount by at least 136 400, in all management positions, saving around R142.7 billion 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 not only does it have a relatively lower impact on job losses but it is also 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 R14.4 billion 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 R88.5 billion over three years. Combining this with a 10% cut in management staff would increase the savings to R37.1 billion in 2020/21 and by as much as R159.5 billion over three years.

For government to make a significant change to the wage bill, it 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 in the public sector wage bill in the medium term. Government needs bold leadership with the political will to make these tough decisions, something it has not been able to do so far.

Kind regards,

Ndivhuho Netshitenzhe
Economist