IT’S the week before the mini budget, and all through the markets, investors are stirring. They are a wee bit uneasy. The stockings are swinging by the chimney. Will St Nicholas appear? The new finance minister, Nhlanhla Nene, is faced with a difficult task in his first medium-term budget policy statement, to be released on October 22.

Economic growth has clearly disappointed in 2014. In the February 2014 Budget Review, Treasury projected GDP growth of 2,7% in 2014. Last week the IMF cut SA’s growth forecast for 2014 to 1,4% of GDP — pretty much in line with my own forecast.

Thus far, revenues are running in line with treasury’s February forecasts. The proportion of the February target collected between April and August is in line with the proportion of revenue collected in the first five months of the financial year since 2009.

The problem is that corporate tax collection is lumpy and there is a very high risk that the key November and December collections will disappoint, as a result of the strikes in the first half of the year.

Trying to convince other ministers to be frugal will be difficult enough. However, the main hurdle is public sector wage negotiations, which have begun with a demand from unions for a 15% wage hike. Treasury cannot afford much more than 6%. The public sector wage bill has grown sharply since 2009.

Initially, this was due to the reckless increase granted in 2009, when the then minister of public administration, Richard Baloyi, demonstrated his complete lack of financial acuity by agreeing to absurd wage hikes.

An argument could be made that Baloyi’s wage agreement is responsible for much of the recent strife in the mining and manufacturing sectors, as private sector unions have sought to catch up with public sector wage increases.

If wages surge and Treasury dodges tax hikes in 2015, borrowing costs will rise as agencies downgrade SA’s debt and investors demand higher interest rates.

Aside from wage increases, the public sector has grown by more than a million jobs since 2009 — with virtually no sign of better service delivery. In particular, education remains appalling. The main beneficiaries of the hikes were retailers, who felt the boom in spending from public sector employees.

If public sector wage increases exceed the February projections, there will be only one outcome: tax hikes. If wages surge and Treasury dodges tax hikes in 2015, borrowing costs will rise as agencies downgrade SA’s debt and investors demand higher interest rates.

The February 2014 budget assumed that the average interest rate SA pays would fall over the next three years. This is not unreasonable as a lot of expensive debt issued in the late 1990s and early 2000s is maturing. However, deterioration in the fiscal picture could quickly reverse this trend.

If Treasury tables tax hikes in next year’s budget, it will need to extend well beyond a "super-tax" on the wealthy. The revenue-raising benefit of such a move is limited. So personal income taxes will need to rise across the board or the VAT rate will need to rise.

In either situation, public sector workers will lose any benefits they gain from another round of excessive wage hikes.

At this point, a VAT hike seems more likely. Despite the hefty political obstacles to such a move, SA’s VAT collection to GDP ratio is relatively low, while the ratios of personal and corporate income taxes to GDP are both quite high. In addition, a VAT hike is supportive of a higher savings rate.

So everyone else will be left to pay for wage hikes that have virtually no probability of leading to better service delivery.

It may be two months from Christmas, but it seems like President Jacob Zuma’s government is left with a stark choice. Either public sector workers get an increase that they may describe as a lump of coal in their stockings this year, or the economy will not have any happy Christmases or good nights for years to come.

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