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EDITORIAL - Wage freeze a first step

Published:Sunday | June 3, 2012 | 12:00 AM

It is Dr Peter Phillips' claim that Mr Audley Shaw, and the Jamaica Labour Party administration more broadly, squandered the opportunity afforded by the Jamaica Debt Exchange (JDX) - the arrangement under which domestic holders of Jamaica's bonds agreed in 2010 to lower yields and longer maturities.

It saved the country more than J$40 billion in interest payments and lowered debt-servicing costs from nearly 60 per cent of gross domestic product (GDP) to a bit above 40 per cent.

The wage agreement for government workers, signed last week between the administration and public-sector unions, is not of the same magnitude of the JDX. It, nonetheless, represents a significant opportunity for Dr Phillips as he attempts to fashion a recovery programme from Jamaica's sickly economy.

But this is a narrow window which the People's National Party administration must negotiate with skill lest, in short order, it, too, is accused of squandering an opportunity for moving Jamaica towards a balanced Budget.

Public-sector employees have agreed to forgo wage hikes for the two fiscal years that ended on March 31. This is a matter over which they had squabbled with the previous government. That frees the Simpson Miller administration from new wage obligations for prior periods and means that negotiations for the periods going forward begin with a clean slate.

slashing wage bill ratio

Lowering the Government's wage bill from more than 11 per cent of GDP to nine per cent was one of the undertakings the previous administration gave to the International Monetary Fund in exchange for a US$1.2-billion standby agreement in 2012. Its inability to make progress on this element of the programme contributed to the collapse of the agreement. Indeed, over the last five years, the nominal wage bill has risen 87 per cent. Over the last two fiscal years, the Government's wage bill hovered at 10.7 per cent of GDP.

This year's wage bill, projected at J$146.9 billion, inclusive of back pay to some groups for previous adjustment, will be 10.5 per cent of GDP. The ratio of public-sector wages to GDP is expected to decline progressively, hitting the nine per cent target in 2015-16.

Wages is second only to debt servicing in government expenditure. Last year, it consumed 43 per cent of all the Government's non-debt revenue. Debt servicing and wages, combined, accounted to 120 per cent of revenue and grants. The Government had to borrow to meet its other bills.

The borrowing habit, which we long knew to be unsustainable, has finally caught up with Jamaica. With its debt of 130 per cent of GDP - one of the world's worst - increasingly few people are willing to lend at a price we can afford to pay. Jamaica, therefore, has to put its house in order.

The current wage freeze is a start. It can be propped up in the short run with inflationary growth in GDP. But a fudge won't last.

For the real solution is fiscal reform and the generation of real economic growth. This process is not easy. In Jamaica's case, it has to be supported by an accelerated overhaul of the tax system, the creation of a modern public sector that supports enterprise, and the reform of the Government's pension system.

As she has shown in these negotiations, Prime Minister Portia Simpson Miller has the ability to sell this truth.

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