Friday, May 08, 2015

Public sector wage dilemma

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One of the issues that has to be resolved, as we move forward with our economic programme, is the matter of public sector wages. Over the past three years, the workers have accepted a wage freeze.

Over this period the exchange rate has moved from approximately J$88:US$1 to over J$115:US$1. Also, inflation would have totaled approximately 30 per cent, which means that public sector wages would have been significantly reduced in real terms. What this means is that public sector workers would have seen a decline in living standards. This is not exclusive to the public sector, as private sector workers have not only faced wage freezes, but also job losses.

This sacrifice by the public sector workers has contributed positively to the the fiscal accounts. Over that period we have successfully completed eight quarterly IMF tests and, more importantly, the fiscal deficit balance has been significantly reduced to near balance. This has resulted in lower inflation rates, lower interest rates, increased business confidence, reducing debt to GDP ratio, and significant slowdown in the depreciation of the exchange rate.

Indicators point up

These numbers are significant, because for the first time that I can recall all indicators are moving in the right direction all at the same time. Previously we would have a combination of either (1) stable exchange rate, high inflation, high interest rates, and deteriorating debt to GDP ratio; (2) devaluation, high inflation, lower interest rates, and deteriorating debt to GDP ratio; or (3) all indicators worsening.

Another positive effect of reducing real wages has been the improvement in the balance of payments, as a result of reduced imports, caused by reduced demand.

One can therefore sympathise with the public sector workers, as significant sacrifice has been made resulting in lower living standards. The other challenge that public sector workers would face is that because of a lack of emphasis on performance compensation, persons who add greater value and go the extra mile still get the same compensation as someone in a similar pay grade who is much less productive. In the private sector this productivity is considered in compensation, for example incentive payments.

The March 2015 fiscal quarter shows that although the more important primary surplus percent target has been met, the amount was some $4 billion less than target. The implication being compressed expenditure, especially on infrastructure, in order to meet targets. This also means that in order to meet our targets at this time, the greater reliance is on expenditure management rather than revenues.

This news comes at a time when the public sector is negotiating for a wage increase and is demanding up to 15 per cent each year for the next two fiscal years. At the same time, the Government is correctly advising that this would threaten the fiscal targets and could result in us jeopardising future IMF tests.

The dilemna

The dilemma is: Do the workers have an argument for double digit increases, or is the Government correct in saying that more than 5.0 per cent would jeopardise the future targets? In the past, for example, when faced with pressure from the public sector unions, the Government would provide the increases demanded and then we'd start the whole process all over again, which is why 53 years after independence we are still in an economic quagmire.

My own view when the budget was presented is that an increase of between four and eight per cent was to be expected. This is simply because any amounts above that would jeopardise the fiscal and economic programme. Too high an increase would (i) eliminate any capital expenditure on infrastructure; and/or (ii) cause a lower primary surplus and higher deficit.

It is for this reason that the best option may be for public sector workers to compromise with the Government's position this fiscal year. This is because any increase that causes us to regress in the fiscal accounts will result in only very short-term benefits, but within a year that would be followed by higher inflation, increased debt, and greater devaluation. In very short order purchasing power would quickly be eroded. In fact, I think any misalignment now may cause even greater hardships than before.

This doesn't mean that public sector workers should continue to sacrifice indefinitely, and what I would do, if I were the union, is get a commitment from the Government that accepting the proposed increase in this fiscal year means that certain things will be put in place to ensure growth, and hence improved tax revenues.

One of the things that has resulted in this impasse, as well as the difficulty faced by public sector workers, is the failure of administrations over the years to adequately address public sector transformation. The focus of course is not on job cuts, but rather transforming the public sector into a much more productive unit, which will facilitate private sector productivity. This will of course result in greater revenues for the fiscal accounts. Bear in mind that a part of this also is to ensure that there is greater emphasis on tax compliance by persons outside of the net.

It is clear to me that any sustainable solution to public sector wages, for the benefit of both the workers and the fiscal accounts, can only happen if there is greater public sector productivity and workers are compensated based on their value added, rather than just seniority.

So I will end with what I also said when the first set of wage freezes started (I think in 2007). Wage freezes are not a sustainable solution to the fiscal accounts and will only delay the inevitable and during that time cause unnecessary suffering. If we want to see better circumstances for public sector workers and the fiscal accounts then public sector transformation must happen.

It is our failure to do this that has once again resulted in the public sector workers seeing declining real wages without any permanent solution to the fiscal accounts.

5 comments:

Tyrone Richards said...

I would suggest that GOJ treat with the wage demand speedily in order to get spending going and prevent a long standing game of abeyance with economic growth. Wage increase will have some multiplier effect that will trigger spending on two fronts i.e cash and borrowed funds. But the banks would have to be careful with how much they lower interest rate to without causing inflation rate going up. The interest rate/inflation rate equilibrium lies in the range of 12%/6 ratio. This way GOJ would boost the tax intake and meet its IMF target. This requires focused attention and coordinated effort with all the stakeholders and might add that the meetings of the minds dont take forever to execute.

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