Public sector wage bill – slugging it out in Labour Appeals Court

As I write the government and labour are clashing in the virtual Labour Appeal Court, in between freeze frames, dropped connections and the acerbic wit of the inimitable Judge Dennis Davis.

In essence:

• Whether or not the government is able to ‘hold the line’ on freezing the public sector wage bill is the biggest identifiable risk to South African economic stability over the next 3 years at least.
• The Labour Appeal Court currently in session is unlikely to stop the conflict – legal or political – over the government breaking of the 3rd and final year of its agreement with public sector unions. The matter could go to the Constitutional Court which means the immediate risk could hang over the economy for – at least – months.
• No matter the outcome, the clash will poison negotiations for agreements and industrial relations in the public sector for 2021 and beyond.
• The crisis has both legal and political implications, with upward pressure on state spending driven by the collapse in employment, the growth of poverty and the Local Government Election in August 2021.

Public Sector Wage Bill

The government yesterday tried to stop today’s long awaited big day in the Labour Appeal Court. The government proposed that the hearing be postponed until February 1 2021 and that all parties go back to the negotiation table.

The PSA and Cosatu refused, even though the court case is not going to immediately resolve the matter, with the possibility of either labour or the government taking the matter to the Constitutional Court.

Thus the timeline of a decision that will have a decisive impact on the quality of government debt and the credibility of the targets of state spending cuts is impossible to determine.

So what?

The very fact that the government tried to back out of the court case and renegotiate the cuts and proposed cuts has raised anxiety in some who invest in our government debt. Was government going to offer more than was indicated in the February budget or the MTPBS? How else would they reach an agreement?

This is the big depth-charge risk that at least contributed to the Moody’s and Fitch downgrades on the 20th of November.

And this is directly about whether and at what price government will be able to borrow in future – and indirectly about what should be the priorities and capacity of government spending. Ultimately it is about whether government will be able to pay its debt or risk the devastating condition of national bankruptcy.

The government has placed all hope of pulling back from the fiscal cliff of deteriorating debt to GDP ratios by freezing the biggest item of government spending, namely the public sector wage bill. Thus the government has broken the final year of a 3 year wage agreement forged in 2018 and has promised to freeze those wages over most of the term of the next 3 years.

Promised who, you might ask? Well, promised the people and institutions that lend government money or assess the quality of the debt government already owes.

Unions are well within their rights to argue that the problem isn’t that government has spent too much on the public sector wage bill but rather that government, the ruling party and/or senior state and party officials have stolen the money – which might be a legally uncertain assertion, but certainly rhymes with the national mood. Government is arguing that it would be unconstitutional to be held to an agreement struck before the devastating economic impact of the Covid19 pandemic; that it cannot, in absolute terms, afford to give the increases to which it previously agreed. For now the struggle is in the hands of the courts, but in the long run it will be fought in the streets and the election.

… and just as an aside

Earlier this week Business Day (1/12/2020) published an interesting article reporting that the Democratic Alliance had voted against the Division of Revenue Second Amendment Bill, which details how revenues are distributed among national, provincial and local spheres of government.

The bill cuts provincial allocations by ZAR60bn – most of which was destined in some shape or form to fulfill ‘contractual obligations’ to public sector employees. If government loses the case in the Labour Appeals Court – and/or in whatever legal processes follow – the Western Cape argues it will be out of pocket by ZAR2.3bn just in the 2020/2021 year.

According to Western Cape finance MEC David Maynier national government has ‘transferred risk to the provinces by preemptively cutting budgets.”

To give you some sense of the weight of the government’s liability with regard to the public sector wage bill – which has grown dangerously as a percentage of non-interest government spending – take a quick glance at compensation data from Annexure B of the the Medium Term Budget Policy Statement from October 2020. It should be immediately apparent that there is not much left over for other crucial expenditure priorities and it is unsurprising that there has been widespread anger that government found ZAR10.5bn for SAA – instead of softening the blow of the wage freeze in the public sector: