PURCHASING POWER IS BEING ERODED BY DEVALUATION

Dec 17, 2013 Features / Columnists, Peeping Tom

---

 

The amount that a government decides to pay or to offer workers as an annual salary increase is not determined by any voted provision in the Budget. In fact, it is the other way around, the voted provision more or less represents some form of catering for whatever Government will offer or decide to pay workers.
Salary increases are matters that are influenced by wages policy. The government has to make provision for this along with a host of other related matters such as the hiring of new staff and promotion of others. The fact therefore that the government may have voted in support of a certain sum of money under a Budgetary category entitled Revision of Salaries does not mean that the voted provision is available for the payment of salary increase.
The Treasury may well be able to afford the voted provision if its financial targets are met. It may equally be unable to afford the provision even if it meets its revenue targets. This can happen for example, if despite reaching its projected revenue target, there are other needs which have to be satisfied and which were not catered for.
Regardless of the monies available to the government, the decision in what levels of salary increases should be paid is most often based on other considerations, foremost of which is a wages policy.
The wages policy of the PPP administration is as predictable as night follows day. And it is not as some would have it merely reduced to paying an annual five per cent increase plus a little extra whenever it is an election year.
To understand the wages policy of the PPP requires an understanding of the assumptions that the PPP makes in relation to wages and its impact on the economy.
The principal economic assumption pursued by the PPP administration is that it cannot afford to distribute wealth that it does not have. That is a lesson that it learnt from the PNCR. As such the PPP’s economic policies are aimed primarily at increasing GDP.
This is where the second set of assumptions comes in. The PPP’s calculates the GDP according to the formula: GDP= C+G+I+NX where C is equal to private consumption, G is equal to government spending
I refers to the level of investment in the economy, and NX is next exports
As can be noted, if net exports is negative this can undermine GDP. It is further assumed that an increase in the money supply through increased wages will increase the disposable income available to private consumers. However, since the internal market is small and most of the consumables in the economy are imported, then an increase in disposable income can lead to increased imports which can lead to negative value of NX which subtracts from overall GDP.
As such the PPP economists are wary of large salary increases since they are convinced that these increases will not be backed by increased domestic production and therefore increased wages will spiral inflation. The PPP has dogmatically followed this line since it got into office and which is the official position of the IMF and World Bank and which states that increases in salaries not backed by both production and exports will lead to increased inflation and reduce GDP growth.
For close to twenty years therefore the PPP has mainly offered single digit salary increases to public sector workers. The only exceptions took place just after the PPP took office in 1993, the arbitration awards of 1999 and in election years when the PPP usually offers a significant increase.
All other increases have generally been tied to the rate of inflation. The problem with this approach is that it has led to a net decline in the purchasing power of workers because even though wages are increased slightly above the annual inflation rate, not many people are convinced that the official inflation rate truly reflects the movement of prices in the economy.
The present situation in the economy is instructive. In its Budget presentation, the government estimated annual inflation for 2013 at 4.3%. What this means is that if the government is successful at holding inflation to this level, the real increase in wages based on a 5% increase in 2013 would be under 1% for workers.
However, serious concerns remain about the actual level of inflation in the economy since the official inflation rate as recorded by the government is not viewed in some quarters as being reflective of the actual movement of prices in the economy. For example, right now the US exchange rate is on a runaway train. Businesses are being forced to purchase US dollars at a rate of G$213 to 1US$. This will drive inflation further up and completely erode the net gain on workers’ wages.
The government therefore, has to revisit the manner in which it sets its wages policy because while each year it offers a meager 5% that increase is more often than not been eroded by inflation.

 

---

---