10 scenarios of higher public wage bill amid a recovering economy

Public servants across the nation are celebrating the recent decision by the Salaries and Remunerations Commission to increase their salaries and benefits. This positive development comes after a two-year freeze spanning the financial years 2021/22 and 2022/23.

The freeze was necessitated by the adverse economic conditions brought about by the Covid-19 pandemic. We delve into the implications of this adjustment on the morale of public servants amid ongoing economic recovery efforts.

1. Consumption-driven economic growth

A higher wage bill at the expense of investment and likely to be unsustainable in the short term. Though the increased wage bill will stimulate domestic demand due to an increase in disposable income, the demand will largely be directed to non-productive sectors, making the whole process unsustainable. Overall, consumption as a percentage of the Gross Domestic Product (GDP) will increase, even as investment levels decrease denoting that the new government wage bill may perpetuate hyperconsumerism.

2. Increased borrowing

The government’s expenditure will increase significantly, in a move that will spike borrowing through the auction of government securities and tax increment for more revenue. Raising funds through government securities will result in increasing interest rates and crowding out of the private sector from credit avenues. New taxes mean a rise in inflation amidst the current economic hardships.

3. Few options to finance wage bill adjustments

Borrowing from the domestic market risks public debt sustainability and is considered a less feasible option. Raising general tax rates through Income Tax or Pay-As-You-Earn and Value Added Tax (VAT) can also have a negative impact on tax compliance and will hit the business climate, reduce disposable income and stifle consumer spending, thus triggering reduced output and employment growth.

4. Reduced investment

The additional wage pressure will have a negative impact on the government’s investment pattern, as it is likely to reduce resources for public investments. This can affect the delivery of Vision 2030 projects which Kenya proposes to leverage and attain a middle-level income, globally competitive and industrialised country with a high quality of life. The government has over time attempted to reduce the public sector wage bill as a mechanism for promoting investment without success.

5. Freeze on employment

While raising the public wage bill can have the positive impact of reducing poverty by increasing income for individuals and families, on the flip side, it can however result to increased unemployment, with the government exploiting the opportunity to ratchet up its automation programme in favour of new hiring, with an eye on improved service delivery. President William Ruto recently announced that beginning in 2023, Kenyans will access all government services through the eCitizen platform, enabling authorities to collect Sh3.2 trillion in revenues each year.

6. Rise in compensation

Higher public wage bills will reflect on material increases in base pay and employee allowances, with the average wage index increasing for teachers, state officers, parliament and police surges. Average compensation is also expected to play a major role in the wage bill explosion, with public sector employment expected to decline as a ratio of the working-age population.

7. Fewer alms to the poor and low-income

The primary argument advanced in favour of raising the public wage bill is that higher earnings would improve the overall standard of living by providing them with a more appropriate income level to handle the rising cost of living. However, a related potential benefit is the projected reduction in the need for both national and county government expenditures on financial aid for poor and low-income individuals.

8. Wage-push inflationary spiral effect

Demands for higher wages from civil servants will likely lead to ad hoc negotiations and salary increases in the private sector. This will result in a wage-push inflationary spiral effect through an increase in the money supply of consumers, with a bearing on inflation when the private sector wages increase, forcing businesses to pay higher wages and charge more for their products or services to maintain the same level of profitability.

9. Fiscal outlook and inflationary pressures

Public sector employees are paid a cumulative Sh1.055 trillion, accounting for 51.8 per cent of ordinary revenues collected. With the latest increase, the wage bill is expected to exceed Sh1.2 trillion this Financial Year, far above the 35 per cent ceiling. This high public expenditure restricts fiscal space for priority capital and social spending and challenges. Across the country, evidence suggests that if sustained, an exploding public wage bill could put upward pressure on consumer price inflation, especially when wage growth exceeds production.

10. Morale booster

An upward adjustment is likely to rekindle enthusiasm and enhance commitment among public servants, resulting in improved productivity and service delivery. This is an intangible benefit that could translate into tangible benefits for the government through improved employee morale. Low pay has been frequently noted as a challenge in providing sufficient encouragement to spur workers to put maximum effort into their job duties. This is particularly problematic with low-wage workers who feel that their job efforts aren’t keeping them out of poverty.