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Editorial: Pay debate and facile economics

Published:Monday | July 13, 2015 | 12:00 AM

We were reminded last week, via a facile lesson in economics, that the Government's wage negotiations with its employees remain incomplete and the danger this poses for Jamaica's agreement with the International Monetary Fund (IMF) and, ultimately, the sustained recovery of the island's economy.

Among the groups with which the Simpson Miller administration is still bargaining is the faculty of the Jamaica campuses of the University of the West Indies (UWI), whose union is the West Indies Group of University Teachers, the head of the Jamaican chapter is Hubert Devonish, a professor and researcher in linguistics. In exchange, apparently, for public-sector employees' acceptance of the Government's current offer of a seven per cent pay hike over two years, Professor Devonish proposed a five-year freeze on all taxes, including user fees for all government services.

The idea has a nice populist ring that will appeal to many people. It plays on the supposed four-year wage freeze from which public-sector workers are now emerging, and in it there are hints of the anti-austerity sentiment of Greece's Syriza party that will resonate with Jamaicans who have had to adjust to the Government's attempts at disciplined management of its finances. Yet, the suggestion gives a wide berth to a serious discussion on fundamental issues such as the structure of the Government, including the services that the State is expected to provide, and how these are financed.

In the last fiscal year, public-sector wages, excluding pensions, consumed 42 per cent of tax revenue. That increased to 77 per cent when interest costs were added. In other words, after these two bills are met, the Government had merely 23 per cent of J$90 billion of its tax earnings to fulfil its other obligations. The upshot: The Government has to borrow, as well as depend on the largesse of other countries' taxpayers, to pay for all the services it promises to Jamaican taxpayers and to maintain the island's physical infrastructure.

PUBLIC WAGE FREEZE A FALLACY

In any event, the notion of a public wage freeze is something of a fallacy, or at least overstatement. State employees have received annual increments and other one-off payments that increased the Government's wage bill between the 2009-10 and 2014-15 fiscal years by J$35.5 billion, or 28 per cent, to J$161.7 billion. That rate of increase lags not far behind the private sector, which was not subjected to a formal freeze.

If, as the populist wish, Jamaica wants to be of fiscal constraints, it can perhaps repudiate its debts. But as even Greece's prime minister, Alexis Tsipras, appreciates, that is not a viable option, even if you are part of a group - which Jamaica is not - that is potentially subject to contagion should your economy melt down. Nor does Jamaica have wealthy benefactors to which it can send the bills for its past fiscal misdemeanours. Realistically, therefore, if the Government is to pay substantially higher wages, it can reduce services or charge more for them, which is to say increase taxes, while it restructures the economy to lay the basis for sustainable, private sector-led growth. There is also the option of employing a smaller staff and paying them better, in which event the Government could cut, perhaps, 15,000 jobs.

Undertaking not to increase taxes for such a long period would be a moral hazard to a government, but it removes from it a critical tool of fiscal management, which should be plain language to Professor Devonish.