Duncan calls for review of wage-to-GDP target
DUNCAN...the Bank of Jamaica will have to manage the overall liquidity in the system (Photo: Joseph Wellington)

CO-CHAIRMAN of the Economic Programme Oversight Committee (EPOC) Keith Duncan is calling on the Government to review the 9 per cent wage-to-GDP (gross domestic product) ratio that was set in the fiscal rules 10 years ago with projections that the target which has been breached for the last few years will continue to be breached in the near future.

The call comes as the recent wage settlement will see the Government paying public sector workers $338 billion in the next fiscal year — a sum equivalent to 11.4 per cent of GDP.

"The GOJ, in [its] efforts to increase and rationalise compensation, will continue to breach the current wages and salaries fiscal rule for the foreseeable future," Duncan said, in clear acknowledgement that even the Government's own Fiscal Policy Paper 2023/24 shows that from the 2022/23 to the 2026/27 fiscal years, public sector wages and salaries will be equivalent to 11.2 per cent to 11.4 per cent of GDP.

The last time it was close to the target of 9 per cent of GDP was when it finished the 2019/20 fiscal year at 9.2 per cent.

The Bank of Jamaica projects that inflation will fall back to the four per cent to six per cent range by the end of the year.

"When the wages-to-GDP rules were put in place in 2013 this was when we had all the wage freezes, so it was basically around nine per cent," Duncan pointed out to the Jamaica Observer. "But since then we have had incremental increases in public sector wages. Now that we have this comprehensive public sector compensation review, we need to reset the wages and salaries to GDP."

Duncan did not offer a target, but said the new level must be set with the "understanding that if we continue to spend at this elevated level going forward, what you are competing against is capital expenditure, support for the vulnerable, education, infrastructure development and other programmes".

He said, at over 11 per cent of GDP, the public sector wage is "high by any standard. Barbados is 8.0 per cent, Dom Rep is 5.0 per cent, Trinidad is probably about 5.0 per cent, and we are at 11 per cent because our GDP levels per capita are not at the levels of those countries. So we just need to reset it and determine where we need it to be in the medium to long term, and set a time frame to get there. We definitely can't say we have a fiscal rule of 9 per cent and we continue to breach it."

Still, even though Duncan was calling for the wage-to-GDP ratio in the fiscal rules to be revised, he praised Minister of Finance Dr Nigel Clarke for the work that was done to complete the public sector reform.

"We're happy that 95 per cent of the public sector — over 100,000 public servants — have completed their negotiations and have signed their compensation agreements for the three-year period 2022/23 through to 2024/25. With the vast amount of public sector bodies signing off, the fiscal risk of carrying over large balances, as the minister finance was pointing out, into next year, has been significantly reduced," he pointed out.

"While we agree that the public sector compensation [reform] needed to be done and wages and salaries for public servants who have sacrificed for so many years through wage freezes and incremental increases was overdue, we now need to ensure that we get on track and have a review of the ratio..."

"With the increased compensation for public servants, and now we're looking forward to the performance management system, where there is a significant investment being made so that we can have accountability and increase productivity. So [too] we need to get efficiency," charged Duncan.

He also called on the central bank to be mindful of the impact the increases in the public sector wages and the national minimum wage could have on inflation.

"The Bank of Jamaica [BOJ] will have to manage the overall liquidity in the system and that is why there are measures like increasing the cash reserve ratio. Maybe they don't want to increase interest rates, so they introduce the cash reserve ratio. So when they look at the overall liquidity they have to manage that," he said.

He however said the downward trajectory of oil prices could have an effect on slowing imported inflation, giving the BOJ some leeway in achieving the targeted range of inflation by year end.

"So you have to look at all sides of the equation…So inflation could come down faster and then you have the offsetting impact of the increase in minimum wage. So all of this needs to be taken into balance," the EPOC chairman stated.

Point-to-point inflation as at February 2023 was 7.8 per cent, declining from a high of 11.8 per cent in April 2022. Core inflation, which excludes the impact of food and fuel prices, fell to 6.6 per cent in February, down from 7.1 per a month earlier.

On this note, Duncan shared that he understands that the public is becoming impatient with high inflation as consumers wanted to have more price predictability. However, he said this will require more time.

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