Serbia - Right-Sizing the Government Wage Bill

Abstract

Serbia's public sector wage bill
 constitutes a significant share of total government
 expenditure. At present, it is significantly higher than in
 most neighboring European Union (EU) member countries. This
 is largely due to higher average levels of compensation,
 rather than higher levels of staffing. While wage spending
 has fallen recently this is not the occasion to be sanguine
 about the Government's wage and employment policies.
 There are two reasons. First, continuing control over the
 wage bill is a key part of the Government's overall
 deficit reduction strategy. Given the Government's
 reluctance to raise taxes and the difficulty it confronts in
 reducing other major categories of expenditures
 (particularly pensions), restraining the wage bill is
 critical to fiscal sustainability. In connection with its
 standby arrangement with the International Monetary Fund
 (IMF), the government is committed to enacting fiscal
 responsibility legislation which would cap wage bill
 spending at eight percent of gross domestic product (GDP)
 over the medium term. To date, the Government has been
 relying on blunt instruments to achieve this target; most
 importantly a freeze on nominal wages and a partial freeze
 on the creation of new positions, both introduced in 2009.
 As the current recession eases, pressures to increase wages
 are mounting. The wage freeze is becoming politically
 unsustainable. More nuanced methods of restraining the wage
 bill are required. Second, over the longer term, the present
 policy of continuous wage and position freezes would
 undermine the quality of public administration. Persistent
 wage freezes would make it difficult to attract and retain
 competent staff. Persistent position freezes would lock in
 existing patterns of over- and under staffing. On the other
 hand, a reversion to the former system of ad hoc adjustments
 in staffing and wages could set the stage for unsustainable
 wage bill growth in the future. Structural reforms are
 therefore required.