Cyprus Mail

Key changes needed in public service wage reform


By Jean Christou

DESPITE the significant reduction in public service wages, Cyprus’ compensation of government employees remains among the highest in the EU, the International Monetary Fund (IMF) said yesterday.

Even after wage cuts of 9–15 per cent and a 3 per cent decline in central government employment, compensation of public employees as a share of GDP is the fourth largest in the EU, it said.

And, on the basis of current projections, the compensation is expected to remain around 14 per cent of GDP by 2018 “which is still about 3 percentage points of GDP higher than the 2013 Eurostat database average of 11 percent of GDP”.

The observations were made in the IMF’s Staff Supplement of October 17, updating information on recent developments, and released as part of the Staff Report prepared by an IMF team for the Executive Board’s consideration on October 20.

This followed discussions that ended on July 30, with Cypriot officials on an Article IV consultation. The staff report was completed on October 3. The documents, including a summary, were released under embargo yesterday.

Where the summary takes an overview of what has been achieved so far under Cyprus’ €10bn bailout programme to which the IMF is a party, the Staff Supplement focuses on selected issues, in this instance including non-performing loans (NPLs) and public service wages.

The IMF said that to address high levels of public salaries and pensions, they could be further reduced.

“To reduce the gap with the private sector, salary cuts could be relatively more targeted to the levels of the salary distribution where gaps are the largest,” it said.

It also suggested subjecting public pension gratuities to income tax, which are currently tax free though the government recently tried suggesting they be taxed. It backed off when public service union PASYDY threatened to strike.

The IMF said currently lump-sum payments received at the start of retirement, averaged around €104,637 per person in 2013.

“Taxing them is estimated to yield about 0.2 per cent of GDP,” said the IMF. “Alternatively, fully phasing them out over time could yield up to 0.5 per cent of GDP. Such measures may need to be accompanied by an increase in the eligibility age to receive a gratuity and/or an unreduced pension to limit incentives for early retirement.”

Another way to cut the public service wage bill would be to reduce employment in select sectors such as education.

“The authorities could consider increasing working hours, increasing class size, extending school schedules, and rationalising non-teaching staff,” the IMF said.

These strategies would all result in a reduced need for workers on renewable contracts. For example, reducing 2,000 workers on renewable contracts could save about 0.4 per cent of GDP in three years.

A low and declining student-teacher ratio for basic education was indicative of excess employment in the education sector, the IMF said.

“While the number of students has been declining due to smaller cohorts, the number of teachers increased almost continuously since the 90s and only recently stabilised.” Secondary education seemed to show the largest excess, with an average of only eight students per teacher in 2011, compared to the European average of 14 in 2010 for basic education.

In fact, according to the report, Cyprus spent relatively more than other countries on general public services, defence, public order, and safety and education, of which wage costs exceeded 65 per cent of the spending in each of these categories by the end of 2012.

It said that measures to rationalise the compensation of employees should be accompanied by a reform of the public administration. The reform would need to address the fiscal consequences of the unfreezing of wages as from 2017, which allows for a resumption of automatic salary increase of 3.6 per cent on average and other wage increases.

Key measures the government needs to consider include carrying out a compensation survey to benchmark government salaries with appropriate private sector comparators, aligning salaries with those of the private sector, reforming pay scales to eliminate automatic increases unrelated to performance, revamping the performance appraisal system and facilitating mobility across the public sector. To maximise its benefits, the reform should also apply to the broader public sector, including semi-government organisations, said the IMF.

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