July 30, 2021

Africa

SOUTH AFRICA: Spending for social peace

BY Anne Frühauf

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( 4 mins)
  • To keep the peace, the government has announced fiscal support for the poor and business in the wake of recent unrest; it has also averted a potentially disruptive public-sector strike by finalizing a wage deal.
  • The government has been at pains to stress the fiscally neutral impact of its spending, and current revenue upsides make the short-term financing more feasible.
  • Nevertheless, if extended, the longer-term affordability of the latest social spending and wage decisions is uncertain if reform momentum remains slow and growth subdued over the medium term.

Response to unrest

Finance Minister Tito Mboweni on 28 July announced ZAR 39bn (USD 2.6bn) worth of fiscal relief for the poorest and support business hit hard by the pandemic and the recent unrest. Of the ZAR 39bn, the lion’s share – ZAR 27bn (USD 1.8bn) – will go towards paying the monthly ZAR 350 (USD 24) social relief grant which is expected to reach about 9.5mn recipients. This is envisaged to run until the end of March 2022 (i.e. past the municipal election if they are postponed until February 2022). However, the recent unrest has moved the needle on the long-running debate around a basic income grant (BIG), which will be extremely difficult to take away. The presidency is already modeling financing options for a potential ZAR 500 (USD 34) monthly grant, which would cost an estimated ZAR 57bn (USD 3.9bn) a year. While recent revenue upsides are the result of an uncertain commodities boom, a BIG could be baked into public finances longer term, even if Mboweni may not announce an extension by the time of the February budget.

To support business, Mboweni and his team announced ZAR 3.9bn (USD 267mn) for state risk insurer Sasria, ZAR 5bn (USD 342mn) for employment tax incentives, and ZAR 2.3bn (USD 158mn) for uninsured small businesses. The price of restoring order in the two affected provinces, KwaZulu-Natal and Gauteng, the South African Police Service will receive an additional ZAR 250mn (USD 17mn) and the South African National Defence Force (SANDF) ZAR 700mn (USD 48mn). The package will be funded by higher-than-expected tax revenue and small further adjustments to departmental budgets.

Public-sector strike averted

Avoiding further economic disruption, the government has managed to avert a public-sector strike by concluding an “interim” one-year wage deal with the majority of public-sector trade unions, including the independent Public Servants Association (PSA), which had earlier vowed to strike. The National Education, Health and Allied Workers’ Union (Nehawu) has refused to sign the agreement, but with the 50% threshold reached among other unions, the agreement will be extended to all public-sector workers.

The deal comes at a price of a 1.5% pay progression increase for 2021/22, which had already been budgeted. Compared with unions’ initial demands of CPI + 4% increases this might be construed as a major victory. What had not been budgeted was an additional monthly cash gratuity for civil servants ranging from ZAR 1,220 (USD 84) to ZAR 1,695 (USD 116). The Treasury expects the gratuity to cost the fiscus ZAR 18bn (USD 1.2bn) but insists the financing will be fiscal neutral. Even if this turns out to be financeable in the short term, Mboweni appears to have been overruled on the size of the gratuity by cabinet colleagues. A longer-term risk is that the agreement provides for the extension of the cash allowance into the next financial year, if no new wage agreement is reached by 31 March 2022. If this were the case, the temporary cash gratuity could start to resemble a de facto salary increase.

Reform imperative

In the wake of the unrest, President Cyril Ramaphosa has pledged, as so often, to accelerate the implementation of his economic reconstruction and recovery program together with business and labor partners. However, he is coming under criticism for throwing money at the problem first, while putting off an ever- more-necessary cabinet reshuffle. Calls for a reshuffle have been reinforced by the security cluster ministers’ poor response to the unrest. Ramaphosa today, 29 July, promised that reconfiguring cabinet was an “ongoing consideration.” Broader security sector reform will also be needed given the extent to which ex-president Jacob Zuma’s tenure had personalized and factionalized these structures.

The greatest imperative will be to invigorate the momentum around broader structural reforms to improve the medium-term growth outlook, the potential for employment creation and fiscal sustainability, particularly if social spending like a BIG were to become a permanent line item of the budget. Implementing recent positive signals – around energy sector reform and ports liberalization – will be essential, while the World Bank has also urged labor market reforms.

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