Service delivery and job creation are expected to take a knock to fund the government's latest public sector pay offer.

As public-sector unions mulled over the government's latest offer yesterday, Treasury spokesman Jabulani Sikhakhane said his department was looking at means of funding the above-inflation increase.

"Based on the experience of last year's wage increases, which were higher than inflation, the revised offer will considerably reduce the ability of government to hire more workers in support of improved service delivery, which in turn will hit the delivery of public services," he said.

To fund the 7.5% pay increase and R800 housing allowance offered to striking public servants, the government will need to milk R6.5-billion from other coffers - that is the amount needed in addition to what was provided for in Finance Minister Pravin Gordhan's February budget.

"Employment by national and provincial governments grew at 4% a year in 2007 and 2008, but because of the wage increases well in excess of inflation in 2009, the pace of growth in the number of civil servants slowed down to 2.4% in 2009," said Sikhakhane.

He said the department was not looking into a tax increase "at the moment", but would need to "cut back on other areas of the budget".

Economists say that the government might have to cut down on capital expenditure - construction of roads, hospitals, schools and airports - although that was not advisable as the budget there was "already low".

Efficient Group chief economist Dawie Roodt said there were only two places from which the money could come.

"One, we could cut down on other expenditure, like buy fewer Mercedes-Benzes for members of Parliament, or, two, we could increase taxes, which is the likeliest option," he said.

Roodt said that an increase in the three sources of tax - personal income tax, company tax and value added tax - could create an uproar.

"We could increase personal tax, but we won't get much there. There aren't enough rich people, and there was a recent hike," he said. "Increasing VAT would see Cosatu throwing its toys out of the cot because it will be heavier on the poor than the rich."

Investment Solutions chief economist Chris Hart said the mediocrity in the public service was because government made it easy for workers to strike and demand general pay increases.

"The across-the-board increase means that some public servants will be paid too little, while some will be paid too much," he said.