Tito walks a tightrope

A line has been drawn in the  sand, with a huge cut in the public-sector wage bill setting the ANC government up for a mighty fight with its union allies.

A few hours after finance minister Tito Mboweni announced plans to cut the civil service wage bill by R160bn in the next three years, trade union federation Cosatu reacted — calling it an “extreme act of provocation”.

The wage bill, which absorbs more than 35% of government spending, has been a big driver of rising expenditure, crowding out spending on goods and services and capital investment, which is important for economic growth.

However, the wage-cut proposal raises the risk of a widespread public-sector strike that could cripple services in hospitals, schools and government offices.

Cosatu parliamentary co-ordinator Matthew Parks said the union was fuming over the government’s announcement that it was seeking to pull out of this year’s wage agreement, and of the R160bn cut.

“It basically says government agreements are not worth the paper they are printed on,” he said.

“We had made compromises for this year’s wage agreement — it is the lowest wage agreement in 11 years — now they say they want to walk away from it.

“The government has failed to take us seriously.

“The ANC — they are so dysfunctional at Luthuli House — they failed to take us seriously and it has put us in a very difficult situation.”

Tabling his budget for the 2020/2021 financial year in parliament , on Wednesday, Mboweni walked a tightrope, forecasting that the economy would grow by just 0.9% this year.

Mboweni bemoaned the fact that public-service salaries had grown by up to 40% in real terms in the past 12 years, which he said was “increasingly out of line with the rest of the economy”.

“The 2020 budget proposes a reduction in the compensation budgets of national and provincial departments, and the entities that receive transfers directly from national government,” the Budget Review said.

“The revised amounts will guide the government’s forthcoming talks in the public service co-ordinating bargaining council.

“These reductions can be achieved through a combination of modifications to cost-of-living adjustments, pay progression and other benefits.”

Mboweni told reporters, just before tabling the budget in parliament, that he was hopeful the government and labour would “find each other” at the negotiating table.

The drop in the remuneration costs for national and provincial administrations and other public bodies would account for the bulk of the expected R261bn in savings, equivalent to 1% of GDP for the next three years.

This will be offset somewhat by a R111bn increase in allocations for ailing state-owned state enterprises, primarily Eskom and SAA.

A salary freeze has been put in place for all public representatives, including cabinet ministers and MPs.

Meanwhile, South Africans can breathe a sigh of relief after the National Treasury decided against increasing VAT (VAT), pay-as-you-earn or other personal income taxes.

Economists had expected an increase in any one of the taxes to make up for the R63bn shortfall in revenue, which is R10bn more than the shortfall announced by Mboweni in October in the medium-term budget.

But the Treasury decided against these tax increases, saying SA had a relatively high tax-to-GDP ratio when compared with other countries at a similar level of development

“New tax increases at this time could harm the economy’s ability to recover,” Mboweni said.

“It would be foolhardy to increase taxes in such a difficult situation,” he told reporters before his speech.

“In difficult situations such as this it would have been preferable to actually have far deeper tax cuts to spur demand and growth in the process.”

The Treasury was also mulling tax proposals which could result in a reduction in corporate tax for the first time in more than a decade, in a bid to boost economic growth.

According to the 2020 Budget Review, the government was considering lowering corporate income tax to below 28% because of SA’s declining competitiveness.

“Reducing the corporate income tax rate will encourage businesses to invest and expand production, improve the country’s competitiveness as an investment destination, and reduce the appeal of base erosion and profit-sharing.”

However, the government would closely watch and punish corporates that shifted their profits to offshore destinations where taxes are lower.  

To make up for no or lower tax increases for companies and individuals, the government is considering introducing new taxes elsewhere, including taxation of electronic cigarettes and heated tobacco products from 2021, as well as possible levies on plastic straws and plastic cutlery.

The Treasury has also adjusted the threshold for transfer duties, meaning those who buy property costing R1m or less will no longer have to pay transfer duty.

Mboweni will also continue to pour money into loss-making SAA, this time allocating more than R16bn to the cash-strapped national carrier to help it meet its financial obligations, including debt-servicing costs.

SAA has made net losses of more than R32bn since 2008 and was recently placed in business rescue, and its future will be decided once that process is concluded.

The national carrier plans to stop flying to several domestic and international destinations from the beginning of next month to reduce operational costs as it battles a cash crunch.

Turning to regional carrier SA Express, which has accumulated losses of R1.2bn in the past decade, Mboweni said the government would have to decide if it still wanted to continue owning the airline.

“The government will need to assess its appetite for continued ownership of the carrier given that it has a limited role in the local aviation market.”

He also told MPs that power utility Eskom would be allocated a further R43.6bn to help service its debts.

This is over and above the cash injection of R49bn that Eskom received in the 2019/2020 financial year.

The SABC  is also in line to receive a further R1.1bn by the end of next month to also help it meet its financial obligations.

The latest allocation to the public broadcaster is the balance of the R3.2bn rescue package the government committed to last year.

Nelson Mandela University economics professor Charles Wait welcomed the news that VAT, pay-as-you-earn and other personal income taxes would not be raised.

However, he remained cautious on the announcement that the government was mulling a possible reduction in corporate tax.

“Unfortunately, we might have to wait for up to three or even four years before this happens, but it bodes well in creating a positive spirit,” he said.

“It will get companies to feel better about the future of the country, but we must remember this will not be implemented overnight.”

Wait said reducing corporate tax would help grow the economy in the long term.

“It means a greater portion of money will be retained from earnings, which could go towards dividends or future expansions.”

On Mboweni cutting state spending by R261bn, Wait said: “The proof will be in the pudding.

“To do this the minister will need immense support from the cabinet and the directors-general of the various departments.

“This will put him on a collision course with the unions. We will have to wait to see what will happen,” he said.

NMU Business and Economic Sciences dean Prof Hendrik Lloyd said though the full R160bn remuneration saving might not happen, Mboweni at least had the courage to put a number down.

“It might not come completely to fruition, but he made the commitment to start the process.

“This was the first, crucial step that needed to be taken,” he said.

“You can criticise the budget on various fronts, but he showed commitment  towards growth and offered a steady, calm hand in what he wants to achieve.”  — Additional reporting by Genevieve Quintal