Contingency reserves to cushion wage hike

CONTINGENCY reserves, funds available from underspending and reprioritisation from other budget lines, would help accommodate the higher public servant wage deal, Finance Minster Nhlanhla said in a written response.

He was replying to a question on Friday from David Maynier, a DA spokesman on finance, and just a few days before he delivers his mediumterm budget policy statement (MTBPS) in Parliament tomorrow.

Nene is under pressure to use the MTBPS to reassure the market of the government’s commitment to fiscal sustainability. South Africa’s sovereign credit rating has been at risk of being downgraded and this has placed a keen focus on the Treasury and its ability to meet budget targets.

Wage increase

Nedbank said growth in the public sector wage bill remained a key point of contention and a flag for international ratings agencies.

Although public sector employees only received a 7 percent wage increase in 2015/16, and inflation plus 1 percent in the following two fiscal years, exorbitant increases in the housing allowance and medical aid subsidies pushed the total government wage bill up by over 10 percent in 2015/16.

In his response, Nene said preliminary indications were that the 2015/16 wage agreement would cost as much as R63.9 billion over and above what had been provided in the budget baseline over the 2015 medium-term expenditure framework.

“(The) National Treasury is certain that the agreements can be accommodated within the current expenditure limits. Contingency reserves will play a role in accommodating higher compensation budgets this year, and so will resources available due to projected underspending. Some reprioritisation from other budget lines will also be required.”

Maynier said the R12.6bn public sector wage agreement wiped out the R5bn unallocated reserve and had left Nene scrambling to finance the R7.6bn shortfall from projected savings and underspending in 2015/16.

Sanisha Packirisamy, an economist at MMI Holdings, said this mismatch between the contingency reserve and overall government compensation needs could be put under pressure on government’s spending mix to make up the difference.

“We would view government tapering their spend on capital expenditure in order to stick to their expenditure ceiling (real spending growth of 2.5 percent projected in 2015/16, declining to 0.7 percent in 2016/17) in a negative light, given the adverse repercussions this would have for trend growth prospects in South Africa.”