Public Sector Pay Freeze: Is It An Option?

The new PML-N government presented its first budget, although on a relatively short notice, on 12th June 2013. Mindful of its fiscal limitations, Government announced various austerity measures. Among them, public sector pay freeze. The actual issue is whether freezing public sector salaries while simultaneously raising taxes is the answer to the fiscal and financial woes experienced by Pakistan.

The new PML-N government presented its first budget, although on a relatively short notice, on 12th June 2013. Mindful of its fiscal limitations, Government announced various austerity measures like the Prime Minister’s decision to keep a smaller cabinet than what is allowed under the Constitution, more than 40% reduction in the budgets of Prime Minister Office and PM House, 30% cut in expenditure other than obligatory expenses like debt servicing, defense, pay and allowances of civil servants and grants (thus saving a hefty amount of Rs. 40 billion), ban on the purchase of new vehicle except for the law enforcement agencies and critical development projects as well as the removal of discretionary grant for federal ministers.


Although Finance Minister did not mention it as an austerity measure in the budget speech, it was the first time in the last 30 years that government employees did not get raise of a single penny in the budget. There were already theories in the air that owing to the tight fiscal position, public sector workers would get only a modest increase of 7.5-10% this time. However, the hopes of these public sector employees dashed to the ground when government decided not to raise their salaries this year and froze them at the current level. Finance Minister explained, in the Post-Budget Conference, that public sector salaries would be raised next year. However, pensioners were lucky and they got a 10% raise in their pension. Additional relief was also proposed for the low pensioners by increasing the minimum pension from Rs. 3,000 to Rs. 5,000.


The decision to freeze public sector salaries created frustration and unrest among public sector workers and protests started throughout the country. The hardship of government employees was compounded with the decision to raise GST from 16% to 17% thereby increasing the prices of all the commodities as well raising the rate of taxation through revising the income tax rates for salaried individuals.


Other allowances like health & housing allowance were not revised as well. Public sector workers consider Pakistan Peoples Party (PPP) led government as pro-worker as it raised salaries and other allowances during its tenure. The salaries of public sector workers were raised by 135% in the first 3 years and by 50% during the last 2 years of PPP-tenure (2008-13). On the other hand, workers saw actually a reduction in their salaries by revision in taxes and increases in the GST.


Nearly 2.7 million (over 650,000 federal employees + over 2 million provincial employees) public sector workers were affected by this decision. It sparked protests throughout the country and the All Pakistan Clerks Association (APCA) observed a black day on Friday to register their protest against the government’s decision of not announcing raise in the public servants’ salaries in the budget. The decision of freezing public sector salaries was denounced by all and the Minister for Finance had to constitute a Committee headed by a senior official from the Regulation Wing of Ministry of Finance to look into the matter. On the recommendations of this Committee, the Finance Minister announced an increase of 10% in the public sector salaries during the current year on 14th June 2013. He further informed that the current move would augment the federal salaries bill by Rs. 20 billion. However, like previous practice, this increase is also an ad-hoc allowance and won’t be merged in the basic pay. This non-merger in basic pay actually minimizes the effect of ad-hoc raise on government resources. Government employees are already getting three ad-hoc relief allowances of 20% of 2012, 15% of 2011 and 50% of 2010 and none of these have been merged in the basic pay. A recent decision by the Islamabad High Court, on 18th June 2013, would increase the pressure on government kitty as it termed the 20% increase in pay for federal government employees (applicable only to Ministries/Division and not to the attached departments/corporations and semi government institutions) as discriminatory and offensive to the constitutional granted rights of these employees. The workers of attached departments/corporations and semi government institutions have been entitled to this special allowance at 20% of pay from 1st March 2013.

 

With the government changing its decision and increasing the public sector salaries by 10%, the issue seems settled however it is not so. The actual issue is whether freezing public sector salaries while simultaneously raising taxes is the answer to the fiscal and financial woes experienced by this nation. Moreover, there is also a need to look into the issues of pay disparity within the public sector.


Since the onset of current financial crisis in mid-2008, freezes/cuts in public sector pay have been a key element of most Governments' fiscal austerity measures throughout Europe. These moves started in Baltic states, Hungary and Ireland then spread to Romania, Greece, Spain, Portugal and the Czech Republic.


It is usual that under the pressure to reduce public expenditure, Governments usually favor the quantitative adjustments like cuts in wages and jobs in the public sector. These adjustments may sound good politically however these have devastating effects at economic and human capitals levels. An ILO study on public sector adjustments in European countries enumerates the various effects of such public sector reforms. As in Pakistan, widespread protests started in European countries after public sector reforms. Wage dynamics are also modified by such changes as public sector workers lose the wage premium they have over the private sector workers (this premium is justified keeping in view the higher level of education in the public sector esp. on higher grades). Wage cuts/freezes also increase inequality and gender pay gap as key parts of the public sector, education and health sectors, are dominated by women. Similarly, lower grade workers are hard hit by the pay freeze/cuts and plunging many of the low paid workers below the poverty line (More than one-third of 650,000 federal workers are lower grade/paid workers). Lower career prospects and wage freezes make public sector work unattractive and it becomes increasingly difficult for the public sector to retain high performers. The quality of public service is also affected with these public sector reforms. If the public sector workers are not paid enough, they are forced to either look for the opportunities to engage in graft or start a sideline business/job (which may involve possible conflict of interest).


There are also economic reasons why public sector wage freeze is a bad idea. It reduces the ability of public sector workers to spend negatively impacting and slowing the economy. With less and less money in circulation, demand for goods is reduced thereby leading to higher levels of unemployment (Aggregate demand effect). Wage freezes/cuts have already been tried in Europe and these have not worked. There are more chances that public sector workers fall below the poverty line (esp. lower grade workers) and their real wages are reduced due to the current rate of inflation (7.5%). If wage freeze is applied for one year and Consumer Price Index is 7.5%, then a worker with yearly after tax salary of Rs. 480,000 would have lost Rs. 36,000 in a single year. This wage loss is nearly equal to a Grade-18 public servant's monthly salary of Rs. 40,000. So, keeping in view the human and economic costs of wage freeze/cuts, it is never advisable to reduce public sector spending by cutting public sector wage bill. Other austerity measures, as indicated in the budget, may be rigorously followed.


The other issue that needs government attention is Pay disparity within the public sector. Pay disparity within the public sector is quite pronounced as some of the government departments are receiving more than double the pay, which others are getting. It is estimated that around 23% of the federal government employees are getting double pay while some others are getting even higher than that. The departments with higher remuneration levels include Armed Forces, Police, Rangers, Frontier Corps, Frontier Constabulary, Federal Board of Revenue (FBR), President Secretariat, Prime Minister Secretariat, ICT, Capital Development Authorit, Motor/Highway Police, Intelligence Bureau (IB), Airport Security Force, ERRA, NAVTTC (enjoyed high pay for many years however recently lost its special pay package), Benazir Income Support Program, Wafaqi Mohtasib Secretariat, Federal Tax Ombudsman's Secretariat, National Assembly and Senate Secretariat, Supreme Court of Pakistan & High Courts and many other autonomous organizations. Other organizations include Securities and Exchange Commission of Pakistan, National Savings, Federal Investigation Agency, NADRA, Pakistan Institute of Medical Sciences, Government Services Hospital, National Institute of Health, OGRA, Pakistan Telecommunication Authority, Earthquake Reconstruction and Rehabilitation Authority, National Commission of Government Reforms, Prime Minister’s Inspection Commission, Board of Investment, Election Commission of Pakistan, Pakistan Housing Authority, Federal Government Employees Housing Foundation, Attorney General of Pakistan, Federal Services Tribunal, Law and Justice Commission, National Accountability Bureau, Special Tribunals, Drug Regulatory Agency of Pakistan, Higher Education Commission, and all departments and agencies working under the ministry of Commerce.

Earlier this year, the Federal Government raised the salaries of federal ministries and divisions by 20%. However, this raise was not extended to the attached departments as well as all other departments that are already getting additional allowances and facilities. There is a need to address this disparity if the government wants to attract and retain high performers. In the current case, even a grade-01 official of these privileged organizations is getting more than a gazzetted officer working in the federal government.


Last Government had also constituted a Unified Pay scales commission under the chairmanship of Dr. Ishrat Hussain to remove anomalies in the existing pay structure of the public sector employees. The current government should look into the proposal and consider implementing Unified Pay Scales as recommended by the Commission to address the grievances of public sector employees.

*The part relating to federal government entities enjoying special pay packages was updated in June 2015

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