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Public-sector wages: are we out of the woods already?

Published:Sunday | April 12, 2015 | 4:00 AMJames Walsh

The Government of Jamaica recently indicated that it intended to end the public-sector wage freeze after five years. This news was understandably greeted with great relief. Public-sector bargaining units responded with claims reportedly ranging from 15 per cent-100 per cent over the next contract period. The Government, for its part, responded with an offer of three per cent in the first and two per cent in the second year. Perhaps predictably, some claimants have been vociferous in their rejection of the offer, one going so far as to describe it as "an insult".

This is a critical issue that has the potential to capsize the national economic ship or throw it so badly off course that it founders once again, resulting in the last stage being worse than first. At the same time, it can also provide an opportunity for what President Obama once described as a "teachable moment" - a discussion that will raise the national discourse and understanding to a level of clarity and appreciation for reality that makes surmounting future obstacles easier.

We can start with what led us to the era of "wage restraint/ freeze" and what these measures were meant to achieve. This is, of course, a part of the larger crisis of structural imbalance that drove us to seek IMF assistance. In a nutshell, we were in a situation of chronic and persistent government and national borrowing to meet budget and balance of payments deficits, resulting in fiscal deficits reaching double digits as a percentage of GDP and to a national debt in excess of 140 per cent of GDP.

In simple terms, this is a case of every year Government spending more than it earns and a country buying more from other countries than it sells to them. To do this, we borrow to fill the gap between earning and spending. With borrowing comes the need for repayment, so this becomes another component of government and national expenditure. As the borrowing continues, the portion of expenditure that has to go for debt repayment rises, reducing the amount left to buy current goods and services. Eventually, a crisis point is reached where the country has to borrow to assist in repaying what was borrowed in the past.

Once a point is reached where the government-country is unable to meet its 'normal' or customary current expenditure needs while meeting its debt repayments, it is palpably living above its means. This is where Jamaica reached some time ago. Let me hasten to indicate that this doesn't mean that everyone is living a luxurious or even comfortable life; it is just a straight accounting fact.

 

brink of economic collapse

 

The point reached prior to the 2013 IMF Agreement was one where the country was teetering on the brink of economic collapse because of its inability to procure adequate foreign exchange to sustain its existing level of economic activity. In plain language, it would not be able to import enough fuel, food, raw material, consumer goods and meet its external payment obligations on its own.

In the absence of the inflows resulting from the IMF extended fund facility agreement, the scramble for available foreign exchange would have driven the price of the USD to a level that would make the present exchange rate look like paradise.

The assessment of our crisis situation said the following, among other things.

1. We had exceeded our borrowing limit, i.e., more than we would be able to repay if drastic changes were not made. Even if we wanted to continue borrowing without implementing the changes, we wouldn't be able to since no one would lend us the money.

2. The Government was spending more than it could afford given the revenues it was collecting. Based on its revenues, it was spending too much on employing people, fixing roads, providing services, funding welfare payments and repaying debt, etc. Regardless of how good these items and activities may be in themselves, the revenue intake showed that they could not be afforded.

3. The proportion of the national income being utilised by the Government was too large because it was drawing resources away from non-governmental activities that would have a greater positive impact in growing the economy.

4. Substantial changes were needed in laws, regulations, administrative practices and government operations to correct the structural imbalances and remove impediments to economic growth.

One of the corrective measures required was reducing the proportion of the national income being absorbed by the Government. Allied to this are measures to ensure that Government limits its expenditure on goods and services to a level it can afford. The wage freeze, government employment freeze and the several substantial tax packages are major elements of the measures to achieve these objectives. The National Debt Exchange, which preceded the agreement, was another measure to reduce government debt-repayment spending in the short term.

The conclusion that the government wage bill needed to be restrained wasn't based on a judgement that the salaries being paid to individuals or particular groups were necessarily "excessive" in any subjective sense. The issue was the Government's lack of the capacity to pay, as evidenced by the need to resort to deficit financing to fund its operational expenses.

The reasoning is simple and direct - what can't be paid out of earnings in circumstances where you are unable to borrow cannot be afforded. The problem with the wage bill is the capacity to pay. This is the prime variable to which its size has to be related.

 

pain and sacrifice

 

There is no doubt that pain and sacrifice have resulted from the measures to correct the collective, though unequally distributed, 'living above our means' that led to the crisis. This should come as no surprise. What has to be made explicit, if it was not done before, is that pain does not, in itself, enable us to gain; it only prepares the ground. It is not the length of the wage freeze but the growth in government revenues, i.e., capacity to pay that really determines the extent of the thaw. The short-term alternative is to significantly reduce the number to be paid, but that is only attractive to those who have not thought through the full social and administrative implications of such a measure.

To resort to an illustration from the earlier days of horses, carriages and carts that many of us still understand, the horse is better at pulling the cart than pushing it. Increasing public-sector wages is the cart, while increasing the Government's capacity to pay is the horse. It's best to examine the condition of the horse before making big plans to move the cart. The only place the cart will go without the horse is downhill.

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