(Extract from the Medium Term Budget Policy Statement)

Government proposes growth in the public-service wage bill of 1.8 per cent in the current year and average annual growth of 0.8 per cent over the 2021 period.

To achieve these targets, which are essential for fiscal sustainability, government has not implemented the third year of the 2018 wage agreement. Furthermore, the Budget Guidelines propose a wage freeze for the next three years to support fiscal consolidation. Additional options to be explored include harmonising the allowances and benefits available to public servants, reconsidering pay progression rules and reviewing occupation-specific dispensations. The next round of wage negotiations is due to start soon and work is under way to formulate government’s position. In addition, government is coordinating work relating to developing a comprehensive public-sector remuneration strategy for the medium to long term. This will include public office bearers, state-owned companies, public entities and local government. The strategy will seek to better balance competing interests on the basis of fairness, equity and affordability.

How much does public spending boost growth? Examining South Africa’s fiscal multiplier

There has been considerable debate on South Africa’s fiscal strategy. Although there is some agreement that the debt to- GDP ratio should stabilise over a reasonable time period, there are questions about how much support government can give to the economy in the short term and how much the state can borrow. The fiscal multiplier – a ratio that measures the extent to which national income changes in response to changes in government spending – is one tool for assessing the trade-offs involved in this debate. A multiplier of more than 1 implies that an additional rand of government spending can translate into more than one additional rand of GDP.

In general, a higher fiscal multiplier implies that more government spending will boost economic growth. Recent research in South Africa1 concluded that spending multipliers are positive, albeit generally smaller than 1. The Reserve Bank estimates that the fiscal multiplier declined from 1.6 to less than zero between 2009 and 2019, as South Africa approached its fiscal limits.2 In general, infrastructure investment multipliers tend to exceed consumption spending multipliers.

The literature shows large negative multipliers from revenue increases, suggesting that South Africa’s growth slowdown over the past five years may be related to rising taxes. The National Treasury’s view is that the potential growth rate is low, the country is reaching its fiscal limits, and the fiscal multiplier is low (or possibly negative). This implies that a large fiscal consolidation to narrow the budget deficit and stabilise debt – complemented by
implementation of structural reforms – is more likely to support economic growth than continued spending funded by higher borrowing and taxation.