A civil service wage agreement surpassing consumer price index (CPI) inflation by even one point will substantially widen the current shortfall in departmental budgets by billions of rands and further crowd out other areas of spending.

The Medium-Term Budget Policy Statement (MTBPS), tabled on Wednesday, revealed that National Treasury expenditure estimates for national departments exceed next year’s budgeted compensation ceilings, even with stable personnel numbers and CPI-aligned salary increases.

“This situation requires determined action that balances competing demands and interests. These trade-offs are particularly stark in the current round of public service wage negotiations,” Finance Minister Malusi Gigaba, tabling his first Budget to Parliament, outlined in the National Treasury documents on Wednesday.

Public service wage negotiations are currently under way.

“We are going into the public sector wage negotiations with a view to get the best deal within the fiscal framework,” Gigaba said, pointing out that it was imperative to ensure affordability.

The Medium-Term Expenditure Framework (MTEF), which provided for an overall increase of 7.3% a year, indicated that many departments were already at risk of exceeding their ceilings and any new service wage agreement comprising increases exceeding CPI, and without a reduction in headcount, would further significantly deteriorate compensation budgets.

“A fair and reasonable compromise between government and State employees in the current round of wage talks is in the public interest,” Gigaba commented.

The MTEF highlighted that a CPI plus 1% agreement would raise the national shortfall in 2018/19 to R8.2-billion, with the gap in provincial compensation budgets amounting to R4-billion.

“At this level, a three-year agreement would push the national shortfall to R11.8-billion by 2020/21, and provincial compensation spending would need to increase by R12.7-billion,” the documents show.

In the current year, public servants received a cost-of-living adjustment of 7.3%, based on an inflation forecast of 6.3%; however, inflation had been revised down to 5%, implying an effective salary increase of CPI plus 2.3%.

Gigaba highlighted that the compensation portion of labour-intensive national departments, such as defence, justice and the police, absorbed a rising share of the budget allocation, which could ultimately result in the shifting of resources from other budget lines into compensation, limiting recruitment of new personnel or finding other means to reduce headcounts.

“Many other national and provincial departments – provincial health in particular – are facing similar pressures,” he added.

This meant that government had been forced, since 2011, to restrict employee headcount growth to accommodate for rising salaries.

Personnel numbers peaked at 1.33-million in 2012/13 and have fallen by about 22 000 since then.

However, while the number of employees stagnated, real remuneration for an employee continued to rise after 2011/12, driving up overall spending on compensation.

“Over the last decade, negotiated yearly cost-of-living adjustments have exceeded CPI inflation by an average of 2%, with employee salaries having increased by an average of 29% since 2008/09,” the MTBPS highlighted.

This translated into an increase in average remuneration, in 2016 rand terms, from R260 000 a year an employee in 2008/09 to R335 000 a year in 2016/17.

This was attributed to above-inflation increases to basic salaries through yearly cost-of-living adjustments; the introduction of occupation-specific dispensation (OSDs), which led to a level shift in the remuneration and conditions of service of teachers, nurses, police officers and others; the introduction of a new salary grading system in 2009 for public servants not receiving an OSD; and promotions, salary progressions and other human resource policies leading to an upward drift in the distribution of personnel across pay scales.