Download 2. Public sector employment as social policy

Sustainable wage bill practices
Maintaining fiscal discipline under pressure
St. Lucia
November 2-3, 2009
Nick Manning
Manager
Public Sector & Governance Unit
Latin America and the Caribbean
Summary
Part 1: Maybe there is a problem
When to worry
Headcount data are weak
Fiscal data are suggestive
The environment is tough –and getting tougher
Part 2: What are the choices? Choosing the target
Numbers
Policy
Organizations
Part 3: Distinctive challenges
Small economies
Public sector employment as social policy
Part 4: Speculations
Increase the awareness
Consider traditional remedies
Install “speed governors”
Part 5: Conclusion
Part 1: Maybe there is a problem
1.
2.
3.
4.
When to worry
Headcount data are weak
Fiscal data are suggestive
The environment is tough – and getting tougher
1. When to worry
• No simple metrics for reviewing the sustainability of the wage
bill.
• The goal is a level of pay consistent with the operation of a
motivated and professional public service at a scale the country
can afford on a sustained financing basis.
• Comparisons with GDP and population are useful only as guides
to judgment.
1. When to worry (cont.)
• Public sector wage bill as % of total general government
expenditures
• As a rule of thumb, can be concerning when this ratio rises
over 25%
• Average government wages compared to per capita GDP
• Indicator of whether government employees are under or
over-paid in comparison to the prevailing standard of living.
• Number of government employees as % of total population (or,
better, % of total employment)
• If an "employer of last resort", governments take on large
numbers of public servants in the lowest grades on meager
wages.
• Recruitment growth rate
• Compare to growth in GDP, revenue or population
2. Headcount data in OECS are weak
-
Data on number of government
employees difficult to obtain:
HRM systems not fully developed,
Data may exclude employment in
public bodies, and information on
non established and contracted
personnel.
2. But some indicators are available at the aggregate level
Total Central Government Employees (established and non established)
as a percentage of total population in selected Commonwealth Caribbean Countries
(2008)
10
9
8
% Total Population
7
6
5
4
3
2
1
0
Antigua and Barbuda
St. Lucia
Dominica
Source: World Bank staff calculations
Grenada
Jamaica
3. Fiscal data are suggestive
Commonwealth Caribbean states are average spenders
Total General Government Expenditure (% GDP)
c.2004
OECD
Latin America
Commonwealth Caribbean
60
50
Brazil
OECD COUNTRIES
40
(% GDP)
Jamaica
30
Venezuela
Bolivia
Argentina
St. Vincent
Costa Rica
Chile
Barbados
St.Lucia
Colombia
Antigua & Barbuda
Grenada
St. Kitts & N.
Dominica
El Salv.
Peru
Trinidad &
Honduras
Belize
Tobago
Nicaragua
Mexico
Panama
20
10
Haiti
Guatemala
DR
0
100
1000
10000
100000
Per capita GDP (log)
Source: IMF Government Financial Statistics and World Bank’s World Development Indicators.
3. But wage bill is higher than comparators
Average wage bill in the Commonwealth Caribbean has been
higher than the average for small states. Some countries
present considerable increases in the last year…
Evolution of Personnel Expenditures in Grenada 2006-2008[1]
(Millions of EC$)
Size of Government and Wage Bill in Small States
(percent of GDP; average 2000-2004)
250
40.0
35.0
200
30.0
25.0
150
20.0
100
15.0
10.0
50
5.0
0.0
Government Spending
Small States
Wage Bill
Comm. Caribbean
Source: Medina and Ota (2008)
0
2006
2007
2008
Salaries (established)
Allowances
Wages (unestablished)
Contracted Personnel (340)
[1] A retroactive salary increase of EC$ 21.9 million, owed since 2007, was disbursed in 2008
3. Some signs of an increase – and certainly no reductions
Source: IMF (2009), Central Bank of Barbados (2009), Ministry of Finance of Grenada (2009)
3. Proportionate to revenues, the wage bill is high
OECS Wage Bill in Comparison
(2008)
45
41.3
40
36.3
35
31.7
30.0
30
27.0
25
20
15
12.3
13.5
11.1
10
3.6
5
0
Revenue as a Percentage of GDP
OECD
Wage Bill as a Percentage of GDP
OECS
Wage Bill as a Share of Total Government
Revenue
Other Similar Small States (N=16)*
* Similar Small States include: Bahrain, Barbados, Belize, Bhutan, Cape Verde, Cyprus, Fiji, Guyana,
Jamaica, Lesotho, Luxembourg, Malta, Samoa, San Marino, Seychelles and Swaziland.
Source: IMF (2009), Central Bank of Grenada (2009), World Development Indicators (2008)
3. Higher than some comparators
Wage Bill as a Percentage of Total Revenues (2008)
60.00
50.00
40.00
30.00
20.00
OECD
average
10.00
0.00
Source: IMF (2009), Central Bank of Barbados (2009), Ministry of Finance of Grenada (2009),
World Development Indicators (2008)
30
% GDP
3. The result is lower non-salary expenditures
General Government Expenditure (% GDP)
c. 2004
60
OECD and LAC countries
Share of Wage Bill / Expenditure
50
Commonwealth Caribbean
OECD average: 42.8%
40
20
Commonwealth Caribbean avg: 20.3%
10
0
Guatemala
Guayana
Dominican Rep
Haiti
El Salvador
Panama
Mexico
Nicaragua
Trinidad and Tobago
Belize
Peru
Ecuador
Colombia
Dominica
St. Lucia
Saint Kitts and Nevis
Antigua and Barbuda
Chile
Barbados
Costa Rica
St. Vincent & Grenadines
Grenada
Argentina
LAC (10 Countries)
Bolivia
Venezuela
Ireland
New Zealand
United States
Australia
Japan
Switzerland
Spain
Jamaica
Czech Republic
Luxembourg
United Kingdom
OECD (26 Countries)
Portugal
Norway
Netherlands
Brazil
Italy
Germany
Honduras
Finland
France
Sweden
Denmark
Source: IMF (2009), Central Bank of Barbados (2009), Ministry of Finance of Grenada (2009), World
Development Indicators (2008)
4. The environment is tough and getting tougher
• Most OECS economies into recession in 2009, without any fiscal space;
• Recovery in 2010 will be slow, and not significant until 2011.
Tight Fiscal Space (2008)
Current Account Deficit (% GDP)
Public Debt (% GDP)
180%
160%
140%
(% GDP)
120%
100%
80%
60%
40%
20%
0%
Source: Economist Intelligence Unit (September, 2009)
4. The environment is tough and getting tougher (contd.)
• Full recovery in key sectors not expected to arrive before 2011
• Earnings from the tourism sector, the region’s main source of employment and foreign
exchange, is expected to fall dramatically in 2009-2010.
Tourism: Stopover arrivals
(% change, year on year)
5
0
-5
-10
-15
-20
-25
• In those countries that do not rely heavily on tourism, such as St Vincent and the Grenadines
and Dominica, growth will be held back by the uncertain future of the banana industry.
Source: Economist Intelligence Unit (September, 2009)
Part 2: What are the choices? Choosing the target
1.
2.
3.
4.
Numbers
Policy
Organizations
Pay
1. Focusing on staff numbers
• Remove ghosts and double-dippers, and fraudulently appointed staff
or staff with forged qualifications
• Likely rather few in the OECS
• Retire over-age staff (working pensioners)
• Review/rationalize lower grade/support staff
• Politically tough, and not big numbers
• Furloughs
• One-off measure, and may need to be repeated in future years
• Recruitment freeze
• Obvious consequence of uneven vacancies
• Attrition (retirement, resignation, death) is generally around 35% per year which represents a significant saving and attracts
less political attention than formal retrenchment strategies.
2. Focusing on policy
• Span of OECS public sector functions matches those of larger countries
• mandate is wide in relation to capacity
• problems in aggressive devolution to the private sector
• local private sector is weak, consisting mostly of small, family owned,
risk averse, under-capitalized trading firms.
• Limited entrepreneurial and management skills.
• Private banks arguably reluctant to lend to businesses
• A major driver is the history of private sector dependency on the
government
• attracting foreign direct investment to offset the weaknesses of the
local private sector have been successful in tourism and offshore
financial services
• investments in other sectors have been more difficult to attract due to
the small size of the local economy; high cost structure; vulnerability
to natural disasters; deficiencies in the regulatory framework
2. Focusing on policy (cont.)
• Two broad options for restraining policy ambitions
1. Expenditure reviews (owned by Ministry of Finance)
• (alias “Strategic Policy Reviews” – Australia; “Strategic
Programme Reviews – Canada; “Interdepartmental Policy
Reviews – the Netherlands; “Spending Reviews” – UK)
2. Functional reviews (owned by the sector ministry or Finance)
• Track record of both is mixed – but occasionally impressive.
• Both rely on assessments that are led from outside of the units
under review, with terms of reference set independently and
extensive use of external experts.
3. Focusing on organizations
• Process simplification/reengineering, IT investments, citizen service
centers)
• consolidation of ministries and departments
• functional reviews of ministries and reorganization
• elimination/merging of single-issue ministries and associated
overhead costs
• reducing mid-level management ranks through reorganization
and broadening spans of control
• administrative function consolidation
4. Focusing on pay
• Review/rationalize allowances
• Payroll audits
• Wage reduction
• Difficult politically – but it has been done
• Typically, downsizing via severance payments or via attrition
• Common problems include:
• The lack of a systematic basis for establishing salary scales in
the civil service relative to those in the public enterprise (and
statutory body) and the private sector
• Persistent fiscal pressure on governments, which works
against the establishment of systematic manpower planning
and pay
• Resistance by civil servants to comprehensive reform
packages and to merit-based pay
• Political resistance to reforms because of concerns about
higher costs or increased independence of the civil service
Part 3: Distinctive challenges
1. Small communities
2. Public sector employment as social policy
1. Small communities – many intricate connections
SBE: When I need a decision or action from government that has a bearing on my company’s
Business,
I approach __________.
The Prime Minister
15%
The Line Minister
50%
The Permanent Secretary
44%
Middle Managers
15%
The clerk who deals with the matter
9%
0%
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: WB OECS Institutional and capacity review, 2001
2. Public sector employment as social policy
• Commonwealth Caribbean governments have traditionally acted as the
employer of last resort (World Bank Technical Paper #259)
• Political expectations of many people that the state will always act as an
employer of last resort
• Recent IMF mission to the OECS stressed that “with very high public
debt, OECS governments have little fiscal leeway to maintain their role
of employer of last resort” and needed to develop well-targeted social
policies instead (IMF Country Report No. 09/175, June 2009).
Part 4: Speculations
1. Increase the awareness
2. Traditional remedies have some short term logic
3. Install “speed governors”
1. Increase the awareness
• Small countries are different: likely larger government role.
 Limited manpower and lack of economies of scale increase
the infrastructure costs of public goods and services
 Harder to contract out the delivery of public services.
• However, the wage bill can crowd out other operating expenditure,
and consequently, efficiency may drop.
• There is a need to explain this situation to the public and the work
force – the key is to present it as a multi-dimensional problem:
• Staffing numbers
• Policy ambitions
• Organizational inefficiencies
• Pay and allowances
2. Traditional remedies have some short term logic
• Recruitment freezes have had a bad press – but not a bad plan
• Negotiating wage and allowance freezes with unions through
social partnerships may help in the short and medium term
• Minimize new contracted or non-established personnel, allowing
for special exemptions to be cleared by highest political authority
3. Install “speed governors”
• Set binding rules that gradually drive down overheads:
• Limit the proportion of General Government Expenditure on
salaries
• Develop league tables showing administrative overheads
between comparable organizations
• Set automatic productivity cuts (alias “efficiency dividends
Part 5: Conclusion
1. The evidence is hazy but suggestive - maybe there is a
growing problem concerning sustainability of the wage bill
2. The economic environment is getting more challenging
3. There are a range of approaches for constraining the wage
bill
4. But let’s not dismiss the distinctive challenges of small
economies with a long history of public sector employment
5. It’s worth thinking about:
• Getting the message out to the public – emphasize that
this is a multi-dimensional problem
• Resorting to traditional temporary remedies
• Installing “speed governors”