Finance minister Tito Mboweni’s plans to cut government’s wage bill by R160 billion over the next three years is sending the right message to ratings agencies – but workers aren’t going to take it lying down, with a fight-back already underway.

Government is seeking to make the cuts by backtracking on a three-year pay deal agreed with civil servants in 2018 and cutting personnel spending by R37.8 billion in 2020/21, with a further R122 billion in wage cuts in the two years that follow, according to Mboweni’s 2020 budget.

However, this stance has been taken as a direct attack on government workers by unions – while analysts, economists and other stakeholders have cast doubt on government’s ability to follow through.

According to Intellidex analyst, Peter Attard Montalto, Mboweni’s comments were a clear line in the sand drawn between government and the public sector unions.

“Pushback from Cosatu is going to be very strong, and we fully expect a large-scale public sector strike at some point this year now. We see the strike as inevitable, but also positive – a sign of necessary pain,” the analyst said.

The strike action won’t be immediate, he said – as it takes time to get approvals and initiate the processes for one – but will likely happen during the current fiscal year, with a possible second strike in the first quarter of 2021 as the next three year wage agreement is negotiated.

Cosatu was outraged in its response to the budget, threatening to collapse the public service sector if the government deviates from its current wage negotiation agreements.

In terms of the agreement, public sector salaries are due to increase up to 7%, or CPI+ 1%, on 1 April 2020 – however, government wants this to be reviewed. Wage negotiations for the next three years are still to take place.

“This feeble and inflammatory budget is a clear message to workers that the battle lines are drawn and the attempts to shift the burden of the crisis to them is in full swing,” the union said.

“Workers will not play victims and the government can rest assured that they will demand and not beg for what is due to them. Cosatu remains battle-ready to push back against this public service cuts agenda.”

Can it be done?

Economists, analysts and even ratings agency Fitch expressed a degree of surprise around the announcement of government wage cuts in the budget speech – but all followed up with the same doubts of whether government will be able to effect the changes.

This was also felt in the markets, which saw a sharp spike in rand strength on the back of the announcement, before falling back as the reality of government’s relationship with labour unions set in.

“While government is planning to slash the wage bill by R156 billion over next three years, which will go a long way to ensure fiscal sustainability, the actual ability to effect this remains to be seen,” said Bianca Botes, Treasury Partner at Peregrine Treasury Solutions.

Fitch noted Cosatu’s response to the announcement, warning investors that the promised wage cuts may simply not materialise. “Labour representatives are showing little sign that they would accept lower wage growth to support fiscal consolidation,” it said.

Citadel chief economist, Maarten Ackerman was more positive on the outlook: “Cosatu’s reaction to the Budget Speech suggests that labour unions will not make it easy for government to action the necessary cost-cutting and successfully renegotiate wage agreements. However, government successfully saw off SAA in its strike in November last year, setting a new foundation for union relations and potentially undermining union power,” he said.

The big risk

Attard Montalto also highlighted this as a massive risk for National Treasury and president Cyril Ramaphosa’s government – as a failure to follow through on this bold promise would leave both politically vulnerable.

“This move can alter the political landscape,” the analyst said. “While the president would have had to have signed off on this move, the risk is that he caves – especially with the ANC National General Council at the end of July. It will be a real test of the ANC National Executive.”

The analyst said the ANC has a habit of agreeing to things that are not on the table and then disagreeing with them when they are.

National Treasury has made the move with the support of cabinet – and if president Ramaphosa caves to the unions, it would break trust between Treasury and the presidency, and between government and the markets, he said.

According to Attard Montalto, the financial reality of the situation was that Treasury has historically over-promised on wage cuts, and with no detail on starting points for negotiations, a rough estimate is that government may be able to cut R65 billion of the promised R160 billion – but even that is in doubt.

“Our rough prior is to expect nothing for the coming financial year and then half of what’s pencilled in for the outer two years. This is a rough estimate, but shows the risks here,” he said.

Read: Unions outraged by plans to pare back state wage bill