Sustainable wage bill practices

Nick ManningManagerPublic Sector & Governance UnitLatin America and the Caribbean

St. LuciaNovember 2-3, 2009

Maintaining fiscal discipline under pressure

SummaryPart 1: Maybe there is a problem

When to worryHeadcount data are weakFiscal data are suggestiveThe environment is tough –and getting tougherPart 2: What are the choices? Choosing the targetNumbersPolicyOrganizationsPart 3: Distinctive challengesSmall economiesPublic sector employment as social policyPart 4: Speculations Increase the awarenessConsider traditional remediesInstall “speed governors”Part 5: Conclusion

Part 1: Maybe there is a problem

1. When to worry2. Headcount data are weak3. Fiscal data are suggestive4. 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

Source: World Bank staff calculations

0

1

2

3

4

5

6

7

8

9

10

Antigua and Barbuda St. Lucia Dominica Grenada Jamaica

% To

tal P

opul

ation

Total Central Government Employees (established and non established) as a percentage of total population in selected Commonwealth Caribbean Countries

(2008)

Commonwealth Caribbean states are average spenders

Source: IMF Government Financial Statistics and World Bank’s World Development Indicators.

0

10

20

30

40

50

60

100 1000 10000 100000

(% G

DP)

Per capita GDP (log)

Total General Government Expenditure (% GDP) c.2004

OECD Latin America Commonwealth Caribbean

Brazil

Venezuela

OECD COUNTRIES

DRHaiti

Guatemala

HondurasNicaragua

Bolivia

Colombia

El Salv.Peru

Panama Mexico

Argentina

ChileCosta RicaSt. Vincent

Jamaica

Belize

Barbados

Antigua & BarbudaSt. Kitt s & N.

Trinidad &Tobago

St.Lucia

DominicaGrenada

3. Fiscal data are suggestive

3. But wage bill is higher than comparatorsAverage wage bill in the Commonwealth Caribbean has been higher than the average for small states. Some countries present considerable increases in the last year…

Size of Government and Wage Bill in Small States(percent of GDP; average 2000-2004)

0.05.0

10.015.0

20.025.0

30.035.0

40.0

Government Spending Wage Bill

Small States Comm. Caribbean

Source: Medina and Ota (2008)

Evolution of Personnel Expenditures in Grenada 2006-2008 [1]

(Millions of EC$)

0

50

100

150

200

250

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

* 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)

27.0

3.6

13.5

30.0

12.3

41.3

31.7

11.1

36.3

0

5

10

15

20

25

30

35

40

45

Revenue as a Percentage of GDP Wage Bill as a Percentage of GDP Wage Bill as a Share of Total Government Revenue

OECS Wage Bill in Comparison (2008)

OECD OECS Other Similar Small States (N=16)*

3. Higher than some comparators

Source: IMF (2009), Central Bank of Barbados (2009), Ministry of Finance of Grenada (2009), World Development Indicators (2008)

0.00

10.00

20.00

30.00

40.00

50.00

60.00

Wage Bill as a Percentage of Total Revenues (2008)

OECDaverage

3. The result is lower non-salary expenditures

Source: IMF (2009), Central Bank of Barbados (2009), Ministry of Finance of Grenada (2009), World Development Indicators (2008)

0

10

20

30

40

50

60

Denmark

Sweden

FranceFinlandHondurasGerm

anyItalyBrazilNetherlandsNorw

ayPortugalO

ECD (26 Countries)United KingdomLuxem

bourgCzech RepublicJam

aicaSpain Sw

itzerlandJapanAustraliaUnited StatesNew

ZealandIrelandVenezuelaBoliviaLAC (10 Countries)ArgentinaGrenadaSt. Vincent &

GrenadinesCosta RicaBarbadosChileAntigua and BarbudaSaint Kitts and NevisSt. LuciaDom

inicaColom

biaEcuadorPeruBelizeTrinidad and TobagoNicaraguaM

exicoPanam

aEl SalvadorHaitiDom

inican RepGuayanaGuatem

ala%

GDP

General Government Expenditure (% GDP)c. 2004

OECD average: 42.8%

Commonwealth Caribbean avg: 20.3%

OECD and LAC countries

Commonwealth Caribbean

Share of Wage Bill / Expenditure

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.

Source: Economist Intelligence Unit (September, 2009)

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

(% G

DP)

Tight Fiscal Space (2008)

Current Account Deficit (% GDP) Public Debt (% GDP)

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.

-25

-20

-15

-10

-5

0

5

Tourism: Stopover arrivals (% change, year on year)

Source: Economist Intelligence Unit (September, 2009)

• 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.

1. Numbers2. Policy3. Organizations4. Pay

Part 2: What are the choices? Choosing the target

• 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 3-

5% per year which represents a significant saving and attracts less political attention than formal retrenchment strategies.

1. Focusing on staff numbers

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

1. Small communities2. Public sector employment as social policy

Part 3: Distinctive challenges

1. Small communities – many intricate connections

Source: WB OECS Institutional and capacity review, 2001

SBE: When I need a decision or action from government that has a bearing on my company’sBusiness,

I approach __________.

9%

15%

44%

50%

15%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

The clerk who deals with the matter

Middle Managers

The Permanent Secretary

The Line Minister

The Prime Minister

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).

1. Increase the awareness2. Traditional remedies have some short term logic3. Install “speed governors”

Part 4: Speculations

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

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 challenging3. There are a range of approaches for constraining the wage

bill4. But let’s not dismiss the distinctive challenges of small

economies with a long history of public sector employment5. 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”

Part 5: Conclusion