Public sector wage freezes

As the government and trade union negotiators lock horns in the Public Service Co-ordinating Bargaining Council, there has been a growing clamour in the business community for the public sector wage bill to be slashed. After all, the ANC describes SA as a “developmental state” in which investment should take priority over consumption. Diverting a third of government spending into wages suggests precisely the opposite tendency.

The government has been forced to cut key grants for municipal infrastructure, water services and urban settlements to accommodate higher pay for more numerous public servants. A growing public sector payroll, meanwhile, forces the finance minister to borrow more, thus crowding out private investment.

Unilaterally imposed public sector pay cuts or freezes offer a tempting route to fiscal consolidation. An across-the board 10% wage cut could, in theory, reduce public spending by a whacking 3%.

But governments elsewhere have accumulated a wealth of experience about the risks of sweeping cuts or freezes. The “conditionalities” imposed by international lending institutions have often damaged countries’ longer-term economic and developmental prospects.

Since the global economic crisis unfolded in 2008, numerous countries have experimented with “austerity budgets”, featuring public sector pay freezes or cuts. The results have been at best mixed.

SA can learn the following lessons from these experiences:

• Wage cuts tend to affect aggregate demand unexpectedly hard because public sector workers have a high propensity to consume. Cuts should therefore be concentrated among highly paid public servants. Government negotiators’ current proposals, which favour employees on levels one to seven and mildly penalise levels 11 and 12, do not go anywhere near far enough;

• Increased taxes tend to promote better distributional outcomes than spending cuts. Carbon taxes, sin taxes and perhaps even land taxes can also contribute to meeting wider policy objectives;

• Approaches that spread the pain around, such as general recruitment freezes and pay cuts for the workforce as a whole, tend to result in suboptimal outcomes. Pay rises should always be linked in some way to productivity gains. Freezes of frontline posts in education, nursing and policing invariably have negative long-term consequences for human and economic development. Cuts should instead reflect a considered strategy to streamline government operations. President Cyril Ramaphosa’s pledge to “review the configuration, number and size of national government departments” is thus welcome;

• The public service is the key motor for class mobility and it has been the vector through which hundreds of thousands of black citizens entered the middle class. The government needs a clearer sense of what such sociohistorical gains are worth to the country and of how to price them; and

• The less tangible costs of freezing recruitment and pay should not be underestimated. When downsizing or cost-cutting, the best private firms prepare detailed implementation and communication plans, and follow these up with employee care and retraining programmes. Downsizing, however, still affects motivation, institutional memory and performance. In the public sector, pay or recruitment freezes that are experienced as essentially arbitrary will similarly undermine employee loyalty and engagement to the detriment of work quality and performance.

The government needs longer-range strategies for improving the quality of state spending and the performance of public servants.

• Butler teaches public policy at the University of Cape Town.

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