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Thursday 19 September 2019
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State wage bill ‘untenable’

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…Wage bill reaches N$25 billion
Economists are raising alarm over the increasing public wage bill which now stands at N$25 billion, cautioning that expenditure should not outstrip the country’s growth.
Despite calls for a leaner and more modern public service, growth in the public service has been unprecedented, so much that Cabinet formulated civil service reforms in a bid to control the escalating wage bill which caters for the annual salaries of more than 100 000 public servants.
For a country that has the 6th largest wage bill relative to GDP in the world, Namibia’s public wage bill continues to be on the increase despite warnings that it might not be sustainable in the future.
The bill is currently a third of the national budget.
Government is however adamant that the money spent on wages for Government employees is justified.
“There are good reasons for the wage bill. However, for stability and sustainability purposes, the time has arrived to look into the matter of containing the wage bill, without compromising on service delivery,” according to the Harambee Prosperity Plan unveiled recently in the National Assembly by President Hage Geingob when he delivered his State of the Nation Address.
“The increased wage bill stimulates domestic demand due to increased disposable income. However, this demand is largely directed to non-productive sectors hence it is unsustainable,” said Salomo Hei, an economist and Makalani Fund Manager for Namibia.
Last year Government already undertook an expenditure cut drive with ministries, public enterprises and other state funded entities being ordered to cut spending due to the country’s fragile economic conditions.
“The additional wage pressure is likely to have adverse effects on the investment pattern of Government thereby impacting negatively on the developmental projects,” said Hei.
Hei is worried that Government expenditure will increase significantly thereby necessitating increased borrowing and therefore increasing interest rates and crowding out the private sector from credit.
“The Increasing public wage bill will have a negative impact on sustainability of the country’s growth trajectory. Economic growth will be consumption driven rather than investment driven and is therefore likely to be unsustainable,” he said.
The increased wages will impact negatively on poverty and rural development in the long run as these become competing priorities, he further cautioned.
Frans Uusiku, a Simonis Storm Securities economist, if the growth in the public wage bill as a normal expectation is viewed from a public development perspective: “It may be more concerning if there is no balance between the provision of the needed public services with the goals of ensuring a long term fiscal sustainability and maintaining a tax burden that does not hurt the economy.”
Uusiku said the general principle is that developing economies of which Namibia is one, are more inclined to have a relatively high social expenditure because of a growing demand for public services, including education, health care, and infrastructure. Adding that: “However, this requires a combination of revenue mobilization and careful prioritization of spending.”
With the wage bill currently at around 17% of GDP in nominal terms, Uusiku is of the opinion that by international terms it is relatively still fine in comparison.
“Plausibly, the HPP [Harambee Prosperity Plan] has recognized the above parameter, and that the government has further committed itself towards fiscal policy consolidation in the mid-term. This gives us some level of comfort, at least in the meantime, but the exact magnitude of fiscal consolidation is yet to be seen,” he said.
Rowland Brown, Head of research at IJG Securities, questioned whether the employees of government create N$25 billion worth of value for the Namibian economy, or enable the creation of this wealth.
“If not, the wage bill simply becomes a redistributive measure where funds are taken from tax-payers and given to the civil service, in exchange for services worth less than the value of the transfer. This cannot continue, sustainably, forever. In this instance, large amounts of tax-payers funds get used up by the wage bill, and do not go to serving the primary objective of Government in creating an environment in which the Namibian economy can flourish, creating jobs and wealth, in an efficient manner,” Brown said.
For Brown, the wage bill is not sustainable in the long term, especially if growth continues “as we have seen over recent years.”
“Large increases in the wage bill through abnormally high revenue collection years means we now have a huge operational budget, as our economic cycle turns down,” Brown said regrettably.
He said the wage bill is likely to increase as a percent of total spending if no steps are taken to remedy the situation.
Fiscal imbalance looms
Hei warned that the growing wage bill could lead to fiscal imbalance that distorts the relationship between government expenditure and available tax revenue.
This, he says, could lead to macroeconomic consequences, which might result in a rising budget deficit and that competes with other priority spending areas.
Uusiku on the other hand warned that the wage bill is a key input in the provision of public services.
Therefore: “Should it become unsustainable, it is likely to drag down the government in its ability to deliver essential public services such as health care, education and skills development, national security as well as maintaining the conducive environment for the private sector to flourish.”
Uusiku however pointed out that on a fiscal front it is normal to expect a high proportion of public spending on public wage bill for a developing economy because of the increasing need to meet public services.
“Perhaps what would be more interesting to understand is the level of prioritization in terms of the relative proportion of the overall public wage bill by sectors like education and health care; national security and public administration,” said Uusiku.
If we continue to see large increases in the wage bill, warned Brown, “there is little doubt that our fiscal position will come under more pressure, pressure which we can ill afford.”
“With debt-to-GDP at 37%, and a debt servicing cost well above many other nations, we can’t keep spending money on net-non-productive activities. We must bear in mind that we had zero debt at independence, and we now have roughly N$60 billion worth,” Brown indicated.
Brown has expressed concern because “the debt has not been used to solve our energy, housing, water or rail issues, for example, but has largely disappeared into operational expenditure and non-critical development expenditure.
Growing economy with no jobs
Although he does not support job cuts in the public sector, Hei said jobs should rather be linked to the output gap.
“A growing economy without jobs is pointless. Mr. Alweendo[Tom] recently stated that the State is an able player and there’s agreement that recent economic success was with direct state involvement especially in countries in the Far East. However the creation of jobs is the responsibility of all economic actors,” Hei noted.
Uusiku is convinced that the absolute number of public servants is not an issue but efficiency is the issue.
“If we assume that all 100,000 public servants are fully qualified as per their job descriptions and execute their duties as such, it would automatically translate into productivity gains to the whole economy, and thus commensurate the costs incurred by tax payers,” Uusiku opined.
Brown said the size of the public workforce is far larger than normal for a country of Namibia’s  population.
“The reason for this is that the civil service is used as a means to create employment, which is completely the wrong approach. Government should create an environment that facilitates a private sector, which creates jobs,” he said. With the private sector employing more people than Government, Brown is adamant that should focus on providing cheap and reliable energy and water supply, ensuring we have a well-educated workforce, ensuring we do not have a bureaucratic Government that makes it difficult to do business instead of focusing on job creation. “If this happened, particularly the employment part, then private sector would be much more efficient at creating jobs,” he said.




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