Cap Public Sector Wages: A Needed Reform

If as most people believe the public sector is not efficient in transforming recurrent and capital revenues into goods and services, then increasing the expenditure on personnel is not going to bring needed change

The debate over what should be the size of public-sector revenue spent on wages seems no closer to being resolved than how large should be the public service itself. Globally, public-sector reform aims to create efficiencies in government services, and one of the key indicators of this efficiency is the labour cost associated therewith, and its relationship to GDP, recurrent revenue and recurrent expenditure.

In November 2019, facing a huge protracted budget deficit, the Ontario government was successful in a Bill brought to the legislature to cap public sector wage increases to 1% annually for the next three years. The major unions representing the more vocal pedagogical workers have sworn to have the matter taken to Court, however Ontario's Treasury Board President describes the move as a "fair and time-limited approach" to eliminating the deficit.

Closer home, we see a somewhat similar innovation unfolding in the Dutch Carib-bean island country of Aruba. Facing serious macroeconomic challenges [explained in last week's issue of the SNAPSHOT], the island's government does not see a way out of swallowing the bitter pill prescribed by the Netherlands to cap public-sector wages at 130 percent of the prime minister's salary. It is intended that no public officer will be paid more than 130% of the PM wages, irrespective of expertise, experience and qualifications. The Aruba Trade and Industry Association, ATIA, and the Aruba Chamber of Commerce & Industry,

ACCI, have appealed to the government to comply. An ATIA governor explained that, "the public sector wages are capped and the government is now trying to introduce a norm that establishes that [State] owned companies can pay their employees the maxi-mum of 130% of the wage of the PM."

An effort launched by the SNAPSHOT to obtain and analyse data for CARICOM States did not return results, and this has permitted the question whether data on the management of the public service in the region are available for public scrutiny.

In the case of the Commonwealth of Dominica, we were able to access quite some data, though the bulk of it are contained in reports prepared by the State for rea-sons other than public disclosure. We therefore were counselled to thread cautiously and consider restricting our use of data to audited reports published by the State.

The column chart to the right is an attempt to show the annual share of recurrent expenditure funding pub-lic-sector wages in Dominica. In comparison with some of our neighbours, this percentage may seem low but most will agree that the debt burden on our States dictates that every other expenditure line must be man-aged with prudence. And this is where the focus on public-sector wage bill must take a different priority from what hitherto had become a norm. The revenue pie for most governments in the region may not be increasing because of expanded economic activity on the ground but by fiscal manoeuvring with tax, levies, duties, fines and surcharges which, by themselves, are contractionary and do not help economies in problem.

If as most people believe, the public sec-tor is not efficient in transforming recur-rent and capital revenues into goods and services, then increasing the expenditure on personnel is not going to bring the needed change. The problem lies in labour productivity, not the size of labour and not the cost thereof.

A certain fixed figure on payroll is a better way to begin.