‘High pay levels are not translating into high-quality public services’

By the end of the year the government will unveil a ‘plan’ for reforming the cost of the public sector, the Cyprus Mail has learned. Whether the changes will be cosmetic or represent a genuine overhaul remains to be seen. Meanwhile, the various interest groups are gearing up for a new bout over the Cost of Living Allowance, one of the components of the high public sector wage bill.

Sources close to the finance ministry said by year’s end the government will roll out a blueprint on how to reorganise the civil service and lower its cost.

It will factor in the recently released International Monetary Fund report, but also the findings of other research commissioned by the ministry currently being carried out by foreign consultancy firms.

“The plan will address the way the civil service functions… that includes payroll but many other aspects as well,” our sources said.

“This government wants to rationalise the function and the cost of the public sector. That doesn’t necessarily mean shrinking the size of the workforce – that’s a misconception. In other words, you don’t have to fire a bunch of people to save money.

“Think of what’s happened in the civil service like a pyramid that’s been inverted. So instead of having the ‘foot soldiers’ do all the work, what we’ve got is too many ‘generals’ – managerial positions and department directors. And the latter are on high salaries.”

Moreover, these higher-level positions did not suffer a freeze on promotions throughout all these years. The hiring freeze – only recently lifted by an act of parliament – concerned first-appointment positions.

Asked about the IMF report and its findings, we were told the government “is taking it seriously.

“We’re currently evaluating it. Some of the suggestions were good, others not so much. The report is advisory…it’s not the gospel, nor does the government have to follow it to the letter.”

The IMF dossier was quite damning of the structure of payments in the public sector. It went so far as to suggest eliminating the 13th salary, reducing the indexation coefficient of CoLA to less than two-thirds of inflation, and slowing down the disbursement of automatic statutory pay increments to civil servants, from every year currently to every two or three years.

“High pay levels are not translating into high-quality public services. The overall performance of the government sector is among the weakest in Europe… the system provides poor value for money,” the report stated.

On Friday, Finance Minister Makis Keravnos, in an apparent bid to address the battle cries raised by civil servants union Pasydy, ruled out scrapping the 13th salary or CoLA.

“We are not discussing these,” he stated unequivocally.

But on CoLA, the minister did intimate that they might tweak it – perhaps pointing to a staggered system.

Head of Fiscal Council Michalis Persianis told the Cyprus Mail that the IMF report affords “a good opportunity” to initiate discussion on the matter of the rate of growth of the payroll, which needs to slow down.

“The public sector wage bill has been increasing by approximately 7.5 per cent annually in recent years. And it looks like it will continue along this trend. The current rate is very high…it exceeds inflation and GDP growth. This can’t go on forever.”

However Persianis is not particularly sanguine: “Judging by the commentary from government officials, my impression is that the publication of the IMF report will simply turn out to be the final act…we don’t expect any meaningful action to be taken based on it.”

Also on Friday the latest round of talks – mediated by the labour minister – between unions and employers on the issue of CoLA began.

In May 2023 an agreement got hammered out for a transitional arrangement setting CoLA at 66.7 per cent of inflation, with an agreement to reach a comprehensive deal on CoLA by June 2025.

The Fiscal Council thinks CoLA has some positive and some negative facets.

“The idea is to enhance the positive aspects and mitigate the adverse ones,” said Persianis.

“A positive aspect of CoLA is that it protects real wages from inflation, and this is particularly true for low-wage earners. But at the same time, it widens the gap between low-wage earners and high-wage earners.”

A possible solution – introduce a staggered system. So for the first €10,000 of income, CoLA might be pegged at, say, 80 or 90 per cent of the rate of inflation. For the next €10,000 income bracket, it would be reduced to 50 per cent. And so on.

“It would be like the inverse of how income tax works. That’s the general idea – but of course subject to a great deal of fine-tuning.”

But here again, Persianis does not impart optimism, given the hard tussle between trade unions and employers organisations.

“Our major concern is that during the talks now underway, evidence and data-based arguments will be relegated to irrelevance, with the outcome determined instead by the political power game between the unions and the employers. It’s really about a tug of war, which side ‘gets one’ over the other. If discussions do proceed on this basis, the result will be sub-optimal.”

He added: “We hope the style of negotiations will change, so we can shift from a zero-sum game to a win-win situation.”

The Cyprus Mail understands that the first CoLA meeting on Friday went well and took place in a “good climate”. Still, that’s likely because nothing substantive was discussed, it was just the opener. The hardball starts next week when the labour minister holds separate meetings with the interest groups.

Director-general of the Employers and Industrialists Federation (OEV) Michalis Antoniou attended Friday’s gathering.

He told us: “We want other parameters to affect how CoLA is calculated – not just the inflation rate. Parameters like the national productivity rate, the rate of GDP growth, inflation and the unemployment rate. All these together will be inserted into a formula that our economists are devising.”

Each of these parameters would have a weighting attached to it in the CoLA formula.

“We’re flexible on discussing the weighting of these parameters,” said Antoniou.

“What we want is to rationalise CoLA. And we do need to address it – this issue can’t stay open-ended.”

In 2023, when the parties to the talks struck an interim deal on CoLA, they had also come to an informal understanding that a final agreement should be reached before the next elections (2026) so that the discussion doesn’t get ‘contaminated’ by politics.

But the differences between the unions and the employers remain vast. The former want CoLA to go back to 100 per cent of the inflation rate, and have set this as a ‘red line’. Some have even begun rumblings of possible industrial action if their baseline isn’t met.

“The problem with CoLA as it stands today,” continued Antoniou, “is that it undermines public finances, erodes the competitiveness of the real economy and actually helps feed inflation.

“Right now the increase in the price of goods is approximately 90 per cent due to external factors, outside of Cyprus. So by and large, the price increases don’t end up in the cash box of businesses. If they did, the businesses could then give something back to workers in the form of CoLA, as used to be the case.”

And on the other hand, Cyprus cannot improve the competitiveness of its economy by resorting to monetary measures – like devaluing its currency. So other means are necessary.

Asked in general about the public sector payroll – which CoLA does affect – Antoniou pointed out that it risks careening out of control.

From 2019 to 2023, the annual wage bill went from €2.7 billion to €3.7 billion – a huge jump.

On the IMF’s recommendations for the public sector, the expert called it a mixed bag.

“Frankly, some of their recommendations are unfeasible, unrealistic. Take the notion of scrapping the 13th salary…politically it can’t be done in Cyprus. Even in the midst of the financial crisis we did not do these things…so does anyone plausibly think we might do them now? It’s outlandish.”