Is it possible for Sri Lanka to afford trillion rupee public service?

As Sri Lanka’s annual public service salary and pension bill exceed one trillion rupees per annum for the first time in history, the writer calls upon Presidential Candidates to present their proposals for meaningful public service reform.  

The budgetary allocation for salaries and pensions for 2019 amounts to Rs. 685 billion. The estimated cost of the public sector salary increases this year is Rs. 120 billion.

The total public sector salary bill for 2019 is therefore estimated to reach Rs. 805 billion. In addition, the budget outlay for pensions in 2019 is Rs. 212 billion and is expected to be Rs. 235 billion in 2020. This will take the annual public service wage and pension bill in excess of one trillion rupees for the first time in history.

 Public sector salary and pension increases boost aggregate demand without generating an increase in supplies in the economy. They are, therefore, inflationary. In practice, the increases in salaries are likely to be eroded by a rise in prices. In addition, the incremental aggregate demand will also leak into imports, thereby putting pressure on the balance of payments. This can then result in a depreciation of the Sri Lanka Rupee, and place further pressure on the price level (inflation). 

These negative effects can only be contained if the salary increases are funded by cutting other recurrent expenditure, raising revenue, or a combination of these two measures. Cutting capital expenditure is a less good option as it reduces growth impulses in the economy. Ultimately, someone 
has to pay the piper. 

The worst option is to fund the salary increases through additional borrowing. Increasing the public debt to fund recurrent expenditure will be highly detrimental as there would be no rate of return to defray the cost of servicing the additional debt incurred. 

Against this backdrop, it is imperative that all Presidential candidates present realistic and sustainable plans and policies to deal with public service reform to the country as part of their election manifestos as a matter of urgency.