Finance Minister Nhlanhla Nene outlined the fallout from the higher-than-budgeted three-year public-sector wage agreement in Parliament last week, telling lawmakers that the 2015 settlement would result in additional costs of 10.1% this year and increases that would be at least two percentage points higher than inflation in the subsequent two years.

A total of R486.2-billion had been set aside for employee compensation in 2015/16, up from R441.1-billion in 2014/15. The wage bill was also set to rise to over R615-billion in 2018/19.

The 2015 wage agreement had led to a Budget shortfall of R12.2-billion in the current fiscal year, R20.6-billion in 2016/17 and R31.1-billion in 2017/18.

The 2015/16 shortfall would be covered by a R5-billion drawdown of government’s contingency reserves and the reallocation of expenditure from other priorities to fund the R7-billion balance. The drawdown on the contingency reserves would be R10-billion in 2016/17 and R26-billion in 2017/18, with the balance to be found from reallocations.

As a result of the settlement, there would be “no room for expanding government employment” over the three-year period covered by the Medium-Term Budget Policy Statement (MTBPS). Departments that had planned to expand headcount or fill vacancies needed to postpone their plans, while some institutions might need to reduce the number of people they employ.

“This is not a sustainable situation,” Nene lamented, while calling for improvements to the negotiation process and reform of public- sector remuneration practices.

In March 2015, national government departments employed 402 748 staff, while the provincial headcount stood at 913 033. The number of employees on government’s payroll peaked at about 1.33-million in 2012 and has declined by about 12 000 since then.

The MTBPS argues that the balance between remuneration levels, employee numbers and productivity needs further consideration.

“Government will seek reforms that strengthen the link between pay and performance, improve payroll systems, simplify remuneration policies, streamline bonuses and allowances, and ensure that institutional arrangements for collective bargaining are effective and mindful of resource constraints.”

For the MTBPS period, though, the shortfall in compensation budgets had significant consequences for public finances, absorbing resources that had been set aside for other priorities.

“Departments will shift funds from other budget lines to meet their compensation commitments. Most of these resources will be drawn from goods and services and capital budgets.”