Ratings agency Fitch has warned that the National Treasury’s projections for the country’s public wage bill does not match up with reality, and risks pushing up the country’s debt even higher.

Commenting on the 2023 medium-term budget policy statement delivered by finance minister Enoch Godongwana at the start of the month (1 November), the agency expressed concern over the minister’s apparent “optimism” around the wage bill.

Godongwana raised the medium-term projection for government debt/GDP, bringing the government’s figure closer to Fitch’s September forecast that the ratio will hit 78.5% in FY26.

Both figures are slightly higher than the 76.9% that the agency had assumed in July when it affirmed South Africa’s rating at ‘BB-’ with a Stable Outlook, and well above the government’s initial forecast of 73.6% in the 2023 Budget.

Adding to the government’s misfires, however, are the finance minister’s comments on the public wage bill.

Fitch said that the MTBPS assumptions around public-sector wage growth “may be overly optimistic”, pointing to risks of higher government debt.

“The government projects a consolidated wage bill increase of 5.1% for FY24 and 2.2% for FY25 – lower than the 7.5% pay increase for FY24 and the CPI-linked increase for FY25 contained in the last public-sector wage agreement,” it said.

Fitch forecasts CPI inflation to reach 5% in FY25.

While the target could still be reached, for example, through headcount reductions, the ratings agency said this is also unlikely.

“South Africa’s general election in May 2024, resistance from unions and high underlying socio-political risks will make significant headcount reduction difficult,” it said.

Poor track record

The government wage bill has repeatedly been flagged as a huge risk factor for South Africa’s debt levels – and the government’s intentions and targets around it have almost always been missed.

Despite the National Treasury pushing back hard against wage hikes in 2023 – budgeting only a 3.3% increase over the medium term – a few public sector strikes later, and this ballooned to 7.5%, increasing the spend on wages by R33.7 billion.

The deal will come at an additional direct cost to the Treasury of R23.6 billion, and government departments will have to find the remaining R10.1 billion through reprioritisation of budgeted funds.

The bill has skyrocketed from R408 billion in 2013/2014 to R724 billion in 2023/2024 – and South Africa, once again, has little to show for it, with state companies collapsing and public services in disarray.

South Africa’s government employee wage bill is also one of the highest among emerging markets. As a share of GDP, it is 3.5% greater than the OECD average.

Given the risk of more strikes and the lack of political will to do anything to anger voters and unions ahead in an election year, it is very likely that the Treasury will again miss its own targets for public sector wages over the medium term.

According to Fitch, the only “durable” resolution of South Africa’s fiscal challenges is a substantial acceleration of economic growth.

However, current projections point to only a minor strengthening in GDP growth to 0.9% in 2024 and 1.3% in 2025, from 0.5% in 2023, presenting challenges for fiscal consolidation.