2 arguments against increases in civil servants’ wages in Portugal

The Portuguese Government is about to announce increases in civil servants’ wages between 2015 and 2020.

The IMF, European Commission and European Central Bank are about to complete the adjustment programme and meanwhile, the President has declared that he would welcome an increase in the civil servants’ wages in the coming years.

Government appears to be leaning towards an increase in wages, in line with the President’s opinion. This demonstrates concern over the upcoming European elections in May 2014 and Parliamentary elections in 2015.

Increasing civil servants’ pay could potentially result in lower corruption levels, as motivated and relatively well-paid civil servants would have a lower tendency to accept bribes. However, a number of arguments can be made against any increases in civil servants’ wages at this stage:

1. A number of cuts in the wages of civil servants were proposed from 2008 onwards but the Constitutional Court blocked their implementation. As a result, unit labour costs are back at 2008 levels in the public sector, while there has been a decrease unit labour costs in the private sector. From this perspective, nothing has changed since the beginning of the crisis, for civil servants.
2. Any increase in wages would have to be justified with improvements in services provided by the State. However, there is evidence that the public is not satisfied with the level and quality of services provided. In its 2013 report (Third European Quality of Life Survey – Quality of society and public services), the European Foundation for the Improvement of Living and Working Conditions finds that the perceived quality of public services in Portugal is well below European average.

Source: Eurofound (2013), Third European Quality of Life Survey – Quality of society and public services, Publications Office
of the European Union, Luxembourg

I do not mind paying civil servants well, as long as I receive a good service in return. The main problem is the low perceived quality of public services in Portugal and from this perspective, increasing wages does not make any sense at this stage.

This is not Hollywood [Economics and Policy]

Whenever a company faces financial trouble, one of the first restructuring measures is to cut the number of non-core subsidiaries. Company restructuring is about specialisation: a business with negative operating income usually needs to make what sells and drop everything else.

A similar approach could be taken by the Portuguese Government to limit spending and improve the country’s public accounts. Following a prolonged period of low GDP growth (or recession) and very high Government debt (128% of GDP and growing), there is a pressing need to cut the size of the State.

Yet, almost 2 years following the intervention of the IMF, ECB and European Commission, the major tangible results of the so-called restructuring measures imposed by the country’s main lenders were a reduction in the wages of civil servants and pension cuts. Any improvements in the State’s efficiency remain to be seen.

Improving efficiency means cutting costs and this could be achieved in a number of ways. The most obvious fix is to cut salaries, which is what  Government did so far. More cuts are likely in 2014, after the European Parliament elections in May. Any serious Public sector restructuring should also involve a reduction in the number of institutes, independent entities and associations that are financed using Government money. One estimate places the total number of Government and Quasi-government entities at over 13.000, for a country with under 10 million inhabitants. These are estimates since not even the Bank of Portugal knows for sure. In fact, no-one appears to know – a tell-tale sign that restructuring is badly needed.

Yet this is not likely to happen. Everyone now understands how things will turn out: there will be no fundamental reforms, nor will the State’s efficiency improve. A significant reduction in the number of State entities is not strictly needed, and will not be executed. The political system as we know it would have to change dramatically. No-one in the political arena really wants that to happen.

All that is strictly needed is to cut wages and pensions, transfer a massive amount of debt from the balance sheets of certain banks to the ECB  – and that is it. Economic miracles happen in Hollywood. Around here? We will probably go back to the usual muddle-through economy. It will go according to plan.

Need for speed [Economics and Policy]

Ever since the country went into financial assistance mode, the Portuguese Government has cut costs essentially by reducing wages and pension benefits. Why is it so hard to admit that, inevitably, some Government institutions are less efficient than average and less efficient than in other European countries? Would it not make sense to conduct some benchmarking and implement reforms?

There is a pressing need for efficiency improvements and this would almost certainly involve merging the significant amount of small institutes, independent entities and regional authorities that were created in the past 20 years.

Hopefully for the better…

The advantages would far outweigh the disadvantages: fewer needless consulting committees, boards, and commissions. Increased efficiency, leaner organisations employing more qualified civil servants would all result in sustainable cost savings.

This Government’s stated aim of tapping financial markets ASAP could create the wrong incentive. This need for speed could well become a way to avoid deeper reforms which would result in a leaner Government sector.