The proposed hike in the salaries of the civil service employees by the National Pay Commission has provided meat for a substantial debate over the past few days. This is arguably the single most discussed economic subject presently. People have taken issue with the proposed large wage increase and expressed concern about the likely adverse consequences for inflation. Some are worried that the wage-hike will push away other priority expenditures, such as development spending. Some have expressed a view that the cost of civil service is getting large in an environment where quality of staff and services provided have worsened and as such they believe the increase is not justified. Some have even expressed a view that this wage award is a political ploy to win over support of the civil service for the Government. The range of views and concerns is diverse and large.
My own view is that the proposed increase in civil service salaries is reasonable and justifiable in light of the functions expected of the civil service. The present pay structure is not commensurate with the assigned responsibilities and it is high time that this is corrected. In this regard, the
Pay Commission recommendations seem to be on the right track. Yet the wage award also provides an opportunity to ask some burning questions that are related to its sound implementation. The Government must seek to address these questions in order to each closure on this ongoing debate.
The Wage Award raises three inter-related questions. First, the quality, efficiency and effectiveness of the civil service are a major development challenge and as such it is proper that the civil service matter is receiving public attention. However, the salary issue is just one element; there are other dimensions of the civil service that should be brought into the debate. Secondly, from a public expenditure point of view, in addition to civil service wage bill, there are major issues pertaining to other expenditure items that require careful scrutiny. Thirdly, the financing of civil service wage bill and other expenditures has important implications for public resource mobilization that must be addressed both to avoid the inflationary consequence of the wage award and to protect priority spending in education, health, social protection and infrastructure.
QUALITY OF CIVIL SERVICE: The quality, efficiency and effectiveness of the civil service are a major problem. There is a concern that the effectiveness of the civil service has deteriorated over time owing to lower quality intakes and the politicization of promotion and postings based on loyalty to the government of the day rather than on merit. There is also a concern that grade inflation has crept in to reward political loyalty without regards to the relevance of these positions for the functions of the concerned department.
Another issue is the size of the civil service, especially at the low end, owing to recruitment based on political patronage.
All these concerns have been expressed in one form or another in the public domain. These may not all be based on proper evidence. Yet, the public perception runs deep. The Wage Award provides an important opportunity to address these issues professionally and with proper data and analysis. Establishment of an expert group to serve as the Civil Service Reform Commission with proper terms of reference (TOR) and political support from the cabinet might be a strong positive indicative step forward.
REFORM OF PUBLIC SPENDING: Civil service wage bill is one major component of public spending but there are a number of other spending items where reforms are much more urgent. Two such examples are the financing of the losses of public banks and the deficits of state-owned enterprises (SOEs). Public banks have long been running large volumes of non-performing loans (NPLs).
Reforms initiated in 2004 were slowly bringing some relief, based on a strategy of corporatization and privatization. These reforms were reversed and since 2012, the volume of NPLs is on the rise. Importantly, there have been major events of theft and corruption in public banks (Hallmark scandal in the Sonali bank and a series of theft in the Basic bank) that have left big holes in the capital base of these banks. The government is now financing these deficiencies in the capital base through budget transfers.
It is highly unethical to finance capital deficiency of public banks owing to thefts by rich and influential people through taxpayer resources. Tax payers would probably prefer to see that their tax contribution goes towards civil service pay than used to fill in the holes in public banks emerging from scandals and scams.
Even when outright theft is not involved, much of the NPLs are the outcome of wrong lending decisions or willful non-repayment based on the political connections of the rich and the powerful. Banking is a profitable business and there is no reason why public banks should not be run and managed commercially and managers held accountable for performance.
Regarding SOEs, most of them have been running deficits for over a long period. These deficits are then funded by the national budget. Should this episode continue ad infinitum? In an environment of tight resources and competing needs, the Government should seriously revisit its strategy and reform the SOEs. It is high time that the government should bite the bullet and put a hard budget constraint on SOEs. A sizable amount of scarce public resources are tied up in the SOEs, most of which are commercial enterprises. The Government should require these SOEs to earn profit and, as owner, earn a positive return on equity. This return can be used profitably to finance critical social spending in health, education and social protection.
These two examples illustrate the broader need to do a careful review of all public spending with a view to improving efficiency and cutting waste. In particular, the reform of public banks and SOEs must be at the top of the public sector reform list.
FINANCING THE WAGE INCREASE: Based on currently available information, assuming that the full award of the Pay Commission is accepted by the Government and implemented in fiscal year (FY) 2015-16, the total wage bill will increase from Taka 312 billion in FY15 to Taka 511 billion in FY16. This implies an increase in the Wage bill by 1.1% of gross domestic product (GDP), up from 2.3% of GDP presently to 3.4% of GDP in FY16.The increase of 1.1% of GDP in one year in one expenditure item constitutes a large increase.
A critical question is how this expenditure growth will be financed. Since this is a permanent structural increase in the budget, it must be financed through permanent means. Presently, the main source of budget finance is tax revenues. The tax to GDP ratio was 11.0% in FY14.This increased from 9.1% of GDP in FY10.Even so, the tax rate is one of the lowest in the developing world.
One primary reason for low tax yield is the very low contribution of personal income tax, which is only 1.0% of GDP. As against this, data from Household Income and Expenditure Survey (HIES) 2010 shows that some 35% of national income accrues to the top 10 percentile. If this richest income group pays even an effective tax rate of 15% (as opposed to the top rate of 25%), total personal income tax collection should go up to 5.0% plus of GDP.
This large gap between actual and potential income tax yield is indicative of a serious structural weakness of the income tax system. Correcting the loopholes should yield sufficient additional revenues to finance the 1.1% of GDP increase in civil service wages as well as necessary expansion in social sector and infrastructure spending.
The worst outcome would be to resort to deficit financing based on borrowing from the Bangladesh Bank (BB). That will certainly contribute to higher inflation. However, it is hoped that this is not the case. Also, the Government must not be complacent that it has a cushion owing to the sharp fall in global fuel oil prices. This cannot be a permanent source of financing the salary increase since international oil prices will likely go up in the next 12-18 months.
Instead, a combination of expenditure cutbacks in non-priority areas and personal income tax increase can allow the Government to absorb the fiscal cost of the Pay Commission Award without creating inflationary pressure or reducing priority spending. The Government also has the option of spreading the implementation of wage award over two years in line with available revenue resources and expenditure cutback opportunities.
(The writer is Vice Chairman of the
Policy Research Institute of
Bangladesh. He can be reached at adiqahmed1952@gmail.com)
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