Johannesburg — AS UNIONS canvassed their members yesterday on whether to accept the government's latest wage offer to end a crippling public service strike, analysts warned the terms of the settlement would put the budget deficit under pressure, and may even prompt rating agencies to take a closer look at SA's credit ratings.

Public Service and Administration Minister Richard Baloyi told Business Day yesterday the government had no choice but to go out and borrow money.

"Obviously, we will have to borrow the money. We dragged ourselves into this point."

Mr Baloyi said an extra R7bn had to be raised, over and above the current R297bn public service wage bill.

The government raised its pay offer to public servants yesterday, from 7% to 7,5%, with a housing allowance of R800 a month, up from its offer of R700. The unions had been demanding 8,6% and a R1000 housing allowance.

After two years of surplus, the budget deficit widened to 6,7% of gross domestic product (GDP) in 2009-10, with plans to trim it to about 4% by 2013, and to moderate borrowing.

"Any way you (look at it), it's exceptionally difficult for government to give in to the high wage demands in this environment," said Dennis Dykes, chief economist at Nedbank.

"It will mean they have to cut expenditure elsewhere ...

"They can cut on fixed investment spending and then you would have a situation where the economy doesn't grow," he said.

At 28%, SA's debt-to-GDP ratio still pales in comparison with the much higher levels of some countries in Europe.

The government has projected it will reach 40% in 2013.

International ratings agencies have warned of risks to SA's ratings on any hint of expanded fiscal spending. "We already have a negative outlook on the rating and for some time we've been flagging some downside risks with regards to rating," said Konrad Reuss, Standard & Poor's MD for SA and sub-Saharan Africa.

"We've seen high wage settlements for a number of years, which might be followed by another one now. Already in February the finance minister highlighted there's very little flexibility to accommodate this.

"In the broader context of budget commitments and fiscal flexibility this is a concern," Mr Reuss said, adding that S&P will wait for the medium-term budget policy statement on October 27 to make a call on ratings.

Moody's said in March any relaxation of spending policies could threaten ratings.

The South African Institute of Race Relations said the wage offer will put pressure on the budget deficit that could be curbed only through borrowing or transferring funds from other priorities.

"This would also mean a shift in the balance of power in the tripartite alliance in favour of Cosatu and away from the African National Congress," said the institute's deputy CEO, Frans Cronje.

The majority of unions, affiliated to the Congress of South African Trade Unions (Cosatu) and the politically nonaligned Independent Labour Caucus, expressed the need to end the strike though they were not sure about mandates from members.

"It has been a very long and exhausting strike but we cannot call it off now until our members have decided otherwise.

I am foreseeing the voting process continuing until tomorrow (Thursday) and our decision would be influenced by various factors," said Koos Kruger, Public Servants Association spokesman.

"We want to have a logical conclusion on the matter and make sure that our members are happy," said Denosa spokesman Asanda Fongqo.

Cosatu president Sdumo Dlamini said the decision on whether to accept the offer would be made public today.

Mr Zuma ordered parties involved in the dispute to find a way to end the strike amid growing political pressure over the damage the strike was causing in the country's economy, health and education sectors.

Mr Cronje said Mr Zuma sacrificed "the strong principled position" on the 7% offer taken by his cabinet ministers, including Finance Minister Pravin Gordhan.

"He has therefore eroded the credibility of the Cabinet who had insisted that an offer of above 7% was not affordable," he said.

He said the President might have done this to shore up his support from within federation union against increasing challenges to his leadership of the ruling party.

The Democratic Alliance's Shadow Minister on Finance Dion George said, even though the government had not given a concrete spending plan regarding financing the extra portion on top of the wage bill yet, partly because a final settlement had not been reached, he was still concerned that the state would have to borrow money for its current expenditure.

"The DA's view is that we will not support extra borrowing for something we already budgeted for. We recognise the government is in a tight position but we need to budget to create production and wealth," he said. Mr George said what was needed was a "total restructuring of the public sector".

"If the minister took very hard look at public sector, see way too many people employed in jobs that don't add value. It's not as if doctors or nurses or teachers were being overpaid overall in any case," he said.

He said it was true that the government would have saved some money from not having to pay strikers during the period they were on strike but this would hardly "fix the funding problem".

Investors have praised South Africa's prudent fiscal policies of the past decade, which have helped gradually to improve the country's credit ratings from international agencies.

SA's debt to GDP ratio is at 28%, much lower than countries in Europe. The state has projected it will reach 40% in 2013.

But there have been some concerns that SA's credit rating could be threatened by the policy of having to borrow to fund the wage deal. Any deal would cost an amount equal to 1% or 2% of its spending given the government's offer and the unions' wage demand.

"We already have a negative outlook on the (SA) rating and for some time we've been flagging some downside risks with regards to rating," said Konrad Reuss, managing director for South Africa and sub-Saharan Africa at Standard & Poor's.

"We've seen high wage settlements for a number of years, which might be followed by another one now. Already in February the finance minister (Pravin Gordhan) highlighted there's very little flexibility to accommodate this," he said.

SA's labour costs are much higher than those of emerging countries like China and India. The average monthly salary, including overtime and benefits, is R6400, according to Statistics SA.

The official average monthly wage for a city worker in China has been 1 783 (261,9) and a menial entry-level factory worker could be on a third of that, albeit with food and dormitory accommodation thrown in, according the government there.

Finance Minister Gordhan hinted in April the government would consider raising taxes to boost revenue and keep the budget in check.

But analysts say raising taxes would be devastating to consumer spending, putting brakes on an already-fragile economic recovery that is vulnerable to a possible global economic slowdown.

"In an environment where growth is still relatively weak and the consumer is still in a phase of recovery it's very unlikely we'll see heavy increases in income taxes," Gina Schoeman, senior economist at Absa Capital said.

"It would hurt growth and we need our households balance sheets to recover over coming quarters," she said.

Mr would elaborate on the new offer today when he addresses reporters in Pretoria.

The National Education, Health and Allied Workers Union (Nehawu) said the revised offer commits all parties to the bargaining council to develop and implement a sustainable home ownership scheme for public service employees to be implemented with effect from April next year.

With Reuters