Who is fooling who in row over wage bill?

We are, it seems, in a fiscal crisis. The culprit, we are told, is the public wage bill. It is growing too fast. We are now spending 13 per cent of our GDP on public pay against, we are told, an ideal of seven per cent.

So serious it is, that the President and his deputy think they need to take pay cuts to get the austerity message across.

Not so long ago, the head of the IMF dropped in and gave our economic management a thumbs up. The IMF is obsessed with public finances, so it seems rather odd that the IMF would give a clean bill of health only for a fiscal crisis of the proportions that the government is signalling with the austerity to pop up in a few months. A fiscal crisis doesn’t happen overnight.

Perhaps even more intriguing, the government has just submitted the Budget Policy Statement for the coming financial year to Parliament as required by law.

One might have expected, given the hysteria that we are now witnessing, that the wage bill crisis would be one of the key challenges that is highlighted. Not exactly.

The wage bill gets a brief mention under “public sector reforms” the seventh subheading (out of eight) of the second item under the first pillar. Notably, it does not feature under “expenditure management” which comes higher up in the item.

NUMBERS BANDIED

It does not end there. The numbers being bandied around are even more confounding. The numbers reported in the Press from the kamukunji held on Monday is a wage bill of Sh500 billion.

The President is reported as having projected the wage bill rising to 13 per cent of GDP or 55 per cent of total tax revenue.

I am unable to find these figures anywhere in credible official data or reports, or anything approximating them.

The Budget Policy Statement 2014 has the most recent and arguably the most authoritative data. The government wage bill in the paper for the current fiscal year is Sh285 billion up from Sh274 billion in the last financial year. It is projected to rise to Sh296 billion next year.

In relative terms, the wage bill declined from 7.5 to 6.8 per cent of GDP, and is projected to decline further to 6.4 per cent of GDP in the next financial year.

So where on earth did the President get his 13 per cent figure from? One possibility is that he was referring to the consolidated public sector, including all State corporations and counties.

The most recent published figures for that are to be found in the Economic Survey. The Economic Survey publishes its figures in calendar years, and not fiscal years. The last publicly available figures are for 2012. The consolidated public wage bill was Sh301 billion, up from Sh215 billion in 2008.

WAGE TO GDP RATIO

It grew by eight per cent per year on average during the five year period. Nominal GDP (the size of the economy before adjusting for inflation) on the other hand grew by 13 per cent. In effect, the wage to GDP ratio declined from 10 per cent to nine per cent over the period.

These figures are of the same order of magnitude as those in a report recently prepared for the Salaries and Remuneration Commission by KIPPRA.

So where did the President get his numbers from? There is one place where I have been able to find a number in the Sh500 billion range. This is a presentation made by the Treasury to the SRC in July last year, titled “Fiscal Sustainability of the Proposed Wage Review.”

The presentation gives the government wage bill for last financial year as Sh295 billion, and a second figure of Sh460 billion, which is inclusive of local government, public universities, security services (defence and NIS) and public investment projects.

It is unclear what the reason for presenting the information this way is. One of the reasons might be to hide the wage bill strength for the security services by mixing it with other things. A better way of doing it would be to consolidate it in the main government wage bill.

But let us unpack this figure. The combined defence and NIS budget was in the order of Sh80 billion. If all of it was salaries, it is only half the additional Sh160 billion of this second category.

This is of course not the case. A realistic case is more like 50 per cent, call that Sh40 billion. Local government wage bill in calendar year 2012 was Sh12 billion. This leaves a good Sh100 billion shillings, a figure close to teachers’ total wage bill, that which would have to be attributed to universities and public investment projects.

This is total baloney as it is, and I would not be surprised if the security services wage bill was double counted. Far from disguising the strength of the security services, the more likely reason for this sleight of hand is scaremongering.

Whatever the case, let us grant the mandarins a figure of Sh80 billion for this second category. This takes the consolidated wage bill for the year to Sh380 billion which is between 10 and 10.5 per cent of GDP, which is more in line with the figures in the economic survey.

Another statement that came out of the dialogue is that public employment is growing faster than population. This one is plucked from thin air. Civil service employment increased by 10 per cent between 2008 and 2012, population by 11 per cent.

Let us summarise. There is no compelling evidence that our public wage bill is in the order of 13 per cent of GDP. Neither is it growing unsustainably. All the published figures show it growing by less than GDP. It is conceivable that there was a sharp jump in the current year due to devolution, but that would be an expected one off, not change of trend.

The only figures that show the numbers of the magnitude the public is being fed were numbers presented by the Treasury to the SRC for the purpose of demonstrating the unaffordability of the wage demands that MCAs and others were pushing for.

That the veracity of the numbers is doubtful is indicated by the fact that the Budget Policy Statement produced by the same people does not convey the same imperative and urgency. In fact, the Budget Policy Statement may just have given the game away.

It reports a supplementary budget request of Sh356 billion. Of this Sh16 billion is provision for salary awards to teachers, lecturers, health workers and the police.

The rest, that is Sh340 billion comprises “additional requests for emergency interventions, FY2012/13 carryovers and others from line ministries”. It goes on to report that these requests have been rationalised to Sh101.8 billion.

So there you have it. The wage bill, even the considerable awards to teachers, lecturers, health workers and police, the providers of the most important public services, are only 16 per cent of the supplementary budget. This hardly looks like a wage bill crisis.

But the question remains whether spending 10 per cent of GDP, or even 13 per cent for that matter, is good or bad. Now, if Uganda or Rwanda spent 13 per cent of GDP on wages, it would be a disaster, as both collect the same said 13 per cent of GDP in taxes.

In effect, they would be spending all their domestic revenue on wages and having to beg and borrow to finance anything else.

Tanzania would not be as badly off as it is now collecting 18 per cent of GDP. We collect 23 per cent, one of the strongest revenue bases in Africa.

Ten per cent of GDP works out to a healthy 46 per cent of revenue on wages. Thirteen per cent would be 56 per cent. It is not ideal, but it is not a disaster either.

IDEAL BUDGET STRUCTURE

What is ideal? An ideal budget structure in my view would be expenditure totalling 27-30 per cent of GDP allocated equally to wage, operations and maintenance (O&M) and capital budget, that is, between nine and 10 per cent each.

This works out to 18 to 20 per cent of GDP recurrent and 9-10 per cent capital or investment budget. We are not far off from this.

We should be able to mobilise two per cent of GDP in external grants, and we can afford to borrow three per cent bringing our total resources to 29 per cent of GDP.

We must now contemplate a number of governance questions.

Is it in order for the Treasury to mislead the SRC? If the Treasury did not mislead the SRC, and indeed the wage bill is 13 per cent of GDP, is it in order for the Treasury to withhold this information from Parliament and the public by publishing a figure of seven per cent in the Budget Policy Statement?

Is the SRC complicit in the scaremongering or does it have evidence, other than the said presentation? What about the President?

David Ndii is the managing director of Africa Economics [email protected]