With the latest round of public sector wage negotiations set to resume following the disruption caused by Hurricane Melissa and following the completion of the three-year wage restructuring exercise in March 2025, all stakeholders must now begin to think about the long-term sustainability of public sector compensation and how this will factor into wage settlements going forward. The three-year adjustment was preceded by a four-year wage agreement inked in 2018 and which was purposefully designed with unions and bargaining groups to give the Government sufficient time to delineate the proposals for compensation and other public sector reforms for implementation in 2022 when the Government initiated a complex recalibration of salary scales across the public sector. A Byzantine and unwieldy arrangement of over 300 emolument bands were condensed to just 16, while a significant number of nearly 200 categories of allowances and benefits were scrapped.

Normally, wage negotiations followed more frequent cycles. The latest compensation restructuring, therefore, represented a one-off initiative in order to, among other things, bring public sector salaries back into proportional alignment with their private sector counterparts and significantly overhaul the system to ensure greater equity and efficiency. As a corollary benefit, workers received a collectively substantial, albeit individually differential, increase in salaries to complement the reform. The wage restructuring, however, was not primarily about deciding on nominal increases in salaries across the board, or fringe benefits as would obtain under the traditional cycle. With the resumption of this regular exercise in April, there are several points for all stakeholders to consider.

First, there remains an imprecise definition of the public sector wage bill which would encompass all aspects of compensation for all workers in its employment. Previously, non-taxable allowances, the largest of which was allocated for travelling, were classified under recurrent programmes expenditure in the budget. These allowances formed as much as 30 per cent to 60 per cent of total compensation and reduced the pensionable income for thousands of public sector workers upon retirement, but in reality their exclusion from the wages and salaries line item understated the true cost of public sector compensation.

These totalled an additional 1 per cent of GDP, bringing the real pre-reform cost of wages and salaries to 10.5 per cent of GDP, up from the headline of 9.2 per cent. However, special circumstances across different public sector entities currently continue to understate the true cost of wages. As an example, subventions made to specific public entities and semi-autonomous authorities are not counted under wages, despite part of the subventions financing the salaries of employees, who are still counted as part of the public sector. The Government should be explicit in the criteria for inclusion in public sector wages in order to give an accurate cost of compensation in the sector.

Second, careful wage bill management must manifest itself through not only disciplined wage adjustments but a controlled increase (if any) in the size of the public sector establishment limited to necessary posts. With better wages it has become easier to fill public sector jobs which were long vacant, to the point that some private sector entities have raised salaries in an attempt to retain workers desirous of transitioning to the public sector. The movement in the compensation line item, in part, also reflects large increases in the number of workers, with a prominent example being the police force, which, for the first time in its history, is operating at full complement through the addition of over 2,000 new officers.

Another practice which directly militated against evaluating the true state of the wage bill was the hiring, over time, of persons on evergreen fixed-term contracts in positions which ought to be permanent and, therefore, part of the formal government establishment. These are distinct from jobs, which, given their short-term nature, should genuinely be contract-based. Addition to the wage bill to give a true reflection of the state of affairs is also likely to inflate it beyond the current wage-to-GDP ratio of 13 per cent. Just before Hurricane Melissa, the recent update to the 2008 System of National Accounts (SNA) initially revised nominal GDP upwards, resulting in a short-lived decline in the ratio to 12 per cent.

Calls for the acceleration of the implementation of the revised Performance Management System (PMS) have also intensified in the wake of the continued cannibalisation of Programmes Expenditure by Wages and Salaries, which currently consumes approximately half of all tax revenues, up from just over one-third prior to the commencement of the Compensation Restructuring Exercise. This crowding out effectively means less money allocated for social spending and growth-enhancing capital expenditure. Productivity must be more effectively measured and commensurately rewarded by the revised system, which is intended to consolidate and replace a system of multiple job evaluation tools across the public sector. Anchoring wages to some form of earnings (whether GDP, tax revenues, or productivity) has also resurfaced.

In the past, and as a condition of previous arrangements with the International Monetary Fund, the Government was required to maintain wages as a fixed percentage of GDP — agreed at 9 per cent and which represented the two-decade average of the wage bill from 1989 to 2009 — but laboured mostly without success. When the improbability of its consistent attainment was conceded, and within the confines of the compensation review where a material breach of the wage target was anticipated, it was dispensed with as a fiscal rule in 2023 through an amendment to the Financial Administration and Audit (FAA) Act. The seemingly uncontrollable rise in wages, however, has reignited debate surrounding the target’s reintroduction. Any new target for wages must invariably account for the gradual upward adjustment in total wages over time, enlarged by the inclusion of annual arrears settlements, significantly lifting the average above the previous long-run figure of 9 per cent.

Each of these elements must be considered in the sustainability of public sector compensation to minimise potential fiscal risk, particularly given the additional constraints imposed by Hurricane Melissa. Economic growth is the desired path towards providing the resources for further wage adjustments; however, this must be complemented by effective management in these and future negotiations.