Our budget crisis forces a choice between Salaries and Services

Last week I called a Special Provincial Cabinet Meeting. This is something we only do in extraordinary circumstances, usually signalling a major challenge or crisis.

We discussed the outcomes of a meeting I attended the previous week in Pretoria, chaired by President Jacob Zuma, where Premiers were told in plain language that urgent and far-reaching budget cuts are needed.

National Cabinet has resolved that money committed to National and Provinces for the new financial year will be substantially cut across the board, the detail of which will be shared in Minister Gordhan’s budget speech.

For the Western Cape this would require substantial budget cuts, running into hundreds of millions of Rand, over the next three years in order to balance the budget.

If we are to apply it in the way National Cabinet has suggested, it will have a major impact not only on our ability to spend on infrastructure, but also on personnel. As a minimum we will need to freeze appointments in vacant posts, and significantly scale down the number of new posts, including teachers, to serve our rapidly growing population.

To understand how we arrived at this point, we need to return to the last round of public sector wage negotiations between the Public Service and Administration Department (DPSA) and public sector unions.

As far as we know the DPSA had been given a mandate from National Cabinet that the total negotiated amount could not go above a fixed threshold and in the Western Cape we budgeted, on Treasury’s budget estimates, for a maximum increase of 5,5%.

We took the additional precaution of warning the DPSA, in writing, that we could not afford more than the budgeted increase National Treasury had projected.

However, despite our “warning” and their mandate, the DPSA’s negotiating team succumbed to pressure from the unions and settled on a 7.2% increase for 2016/17. Together with the increased housing subsidy and medical aid, the overall increase amounts to more than 10%.

Different spheres of government were simply expected to fund the difference from within existing budgets.

After learning of this decision, I wrote to the DPSA Minister at the time, the late Collins Chabane, to set out our concerns about the unmandated agreement.

The citizens of the province would have to suffer because of an unmandated agreement reached on the basis of money that was never available.

Which begs the question: how was it possible for the DPSA negotiators to concede to the demands, knowing the full implications of their decision, which had been pointed out to them by us in writing prior to the commencement of the negotiations?

Faced with the challenge of having to find money to implement an agreement we could not afford, we approached National Treasury to foot the bill for the unbudgeted R1,249 billion increase to our wage bill for 2016/17 alone (without counting the enormous additional amounts for the carry-over in subsequent years).

National Treasury appeared to appreciate our position and informed us that the shortfall we (and other provinces) would incur as a result of the decision, would be made up from the government’s contingency fund, established by National Treasury for unforeseen circumstances that might occur.

While this did not remove the concern we had raised over the wage negotiation process, it alleviated the need to pursue remedies to make up our budget shortfall.

However in our recent meeting in Pretoria, it was made very clear that Cabinet has now decided we will face further cuts because there is simply no money to give us.

In explanation of this “about turn” we were informed that a new crisis had arisen due to national government’s chronic under-funding of Higher Education over many years, which, together with the general state of the economy, means that the money promised to us by National Treasury to cover at least a portion of the unbudgeted public sector wage increases must be reprioritised for payment elsewhere.

My response was simple: If this is the case, we cannot afford the salary increase of 7,2% and must revert to 5,5%. Surely everyone employed in South Africa’s bloated (and well paid) public service will understand that there is really no viable alternative?

But 2016 is an election year, and the national government has to keep the public sector unions (the only ones still loyal to the government) on-side.

So we were told that, despite the withdrawal of the additional funds, the wage increases would go ahead, and we would have to make up the savings elsewhere. We were back to square one.

In a sleight of hand, the National Government said they were still giving us the money they had promised in order to make up the salary shortfall, but were simultaneously withdrawing a commensurate amount from other budgets, because “priorities had changed”.

No matter what fancy words are used to describe the impact of the cabinet’s decision, the fact remains that prior to the wage agreement being signed, the Western Cape Government did not have a shortfall in its budget; after it was signed we had a shortfall of about R3 billion over the next 3 years.

As an autonomous sphere of government, we must, by-and-large, be able to set our own priorities within national policy frameworks. It is impossible to justify inflated salary increases at this time on the basis of the National Development Plan, which is the key national policy framework to which we are committed.

The implications of this directive are dire, and Treasury suggestions have included the rationalisation of our current work force -- which is code for “retrenchments”.

For a provincial government that has tried its level best to implement good policy decisions, cut costs and manage our budget well, this is a bitter pill to swallow.

We achieve clean audits when millions go to waste in other provinces and bankrupt state-owned enterprises.

Our expenditure on personnel as a percentage of the budget, is the lowest in the country, at 53,2%, compared say to Limpopo’s 72,9%.

But when budgets are cut, there is no distinction between good governance and bad.

Whilst any budget amendment needs to follow a legislative and consultative process, there seems to be little doubt that Cabinet regard their decision as final and binding. And so last Wednesday, my Western Cape Cabinet colleagues and I set out to explore the various options at our disposal.

We are mindful that this is not a static crisis. Economic growth is slowing, now predicted to be just 0.7% this year, the Rand has plummeted against international currencies on the back of the firing of a Finance Minister, and we are perilously close to being downgraded to junk status with credit institutions whose opinions matter.

This means potential investors will be wary of doing business with us, while the cost of national government borrowing from elsewhere will be much higher than at present.

Quite how mega projects like the National Health Insurance and Russian Nuclear Deal (to which President Zuma remains committed) will be funded is incomprehensible.

At this stage, we identified three options at our disposal:

- To get the DPSA 7.2% wage increase agreement set aside or reversed so as to ensure that it aligns with the mandate and the allocation provided to us for this purpose by the National Government; or

- To insist that National Treasury provides the shortfall in funds. This will mean key policy decision changes by National Government; or

- To take the option presented to us by the Presidency in Pretoria and initiate the process of “rationalising” our public service so as to ensure we have enough money to continue frontline service delivery and pay our remaining employees their increased salaries every month. This may make sense in other provinces, but in the Western Cape (by and large) we are not over-staffed.

These three options will now be interrogated further. It would make the most sense if we could all revert to the affordable 5,5% increase which Treasury endorsed. This would be in the best interests of citizens and service delivery.

Sure, it will require a small sacrifice by people who are already privileged merely to have a job in these times of mass unemployment. It is time to make this small sacrifice in the interests of the country.

This article by Helen Zille first appeared in Inside Government, the online newsletter of the Premier of the Western Cape.