Reducing govt. spending with 100,000 new jobs?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

By Aneetha Warusavitarana

From unannounced inspections of government offices to broader commitments to bring the public service to its former glory, the catchphrase for our new Government is efficiency. In the case of some policy measures, the Government has stood by their statements,and has taken steps to curtail the excesses and inefficiencies of the State. The most recent step towards achieving this was highlighted by a presidential circular which limited the allowances and official vehicles of chairpersons, while also directing state entities to reduce unnecessary expenditure, and create a 25% saving from their approved budgets. While it remains to be seen if these cuts in state expenditure will materialise, the sentiment can be applauded.

Efficiency in the public sector combined with a reduction of government spending plays a bigger role for the Government, and goes beyond the objective of providing quality services to the public. It is common knowledge that while we are now upper middle-income, the country has to face some challenging economic realities. There are significant debt repayments that have to be made, and the projected growth rate for the economy is not promising at 3.5%.

Recent tax cuts have raised concerns that the drop in government revenue will exacerbate the problem rather than improve it. Sri Lanka has been downgraded by two major credit rating agencies; Standard and Poor’s (S&P) and Fitch Ratings, both of which have stated the tax cuts and an expectation that fiscal consolidation will be left on the wayside as one of their rationales behind the downgrading.

Countering these claims, the Government has argued that the tax cuts will provide a much-needed stimulus to the economy, and will trigger economic growth. It also argues that the loss in revenue will be offset by a reduction in public expenditure as excesses of the State are curtailed and spending is prioritised. Efficiency is a key component in the Government’s argument that the country’s macroeconomic status will be a promising one in the coming years.

100,000 jobs we can’t afford

With parliamentary elections around the corner, the pressure to secure a majority is mounting, and the Government has announced that it will provide 100,000 jobs in the government sector – a surefire way to secure votes. This increase in government jobs is in contradiction to its aim to reduce government expenditure; these new entrants into the government service have been promised a salary of Rs. 35,000, creating an increase in government expenditure that we can ill afford. Salaries already constitute the second largest source of government expenditure, and this has long-term implications as pension commitments grow.

The provision of these jobs is part of the work carried out by the Multi-Purpose Development Task Force. The objective of this task force is to empower families that are eligible for Samurdhi benefits, but do not receive it. The programme will absorb unskilled individuals who have either low levels of formal education or no formal education at all. These individuals will be recruited to fill vacancies that do not require specific qualifications at schools, hospitals, and other state institutions. Candidates will also be absorbed into sectors of masonry, carpentry, agriculture, fisheries, and forest conservation, with training provided.

Confusingly, the Government expects to reduce annual expenditure on agri-product imports by Rs. 2 billion through this employment scheme. Even if this increase in employment will boost agricultural productivity to a level in which the country saves on imports, this saving will not entirely offset the increase in expenditure on salaries.

Even though the objective of economic empowerment is commendable, there are once again questions that need to be raised. Targeting of families for Samurdhi benefits is notoriously poor, and there is no guarantee that the Government will be able to target individuals for this scheme any better. There are better and more effective ways to create meaningful economic empowerment – investing in vocational training programmes tailored to labour market gaps in the private sector would, for instance, be a workable alternative to handing out jobs.

Bloated government service and corruption

While this increase in government jobs is not in line with promises to continue fiscal consolidation, there are also more worrying consequences to this decision. The Government has promised to crackdown on the corruption that runs rampant in the government sector, but beyond that by increasing the size of the state sector, the Government is increasing opportunity for corruption. In instances where a country’s institutions are weak, self-interested individuals have greater opportunities to engage in rent-seeking behaviour.

Additionally, at this point in time, the Government should be focused on placing limits on the government service – greater numbers most rarely result in increased efficiency, and leaving efficiency aside, this is a step that the Treasury can ill afford.

Given that efficiency in the public sector and limited government expenditure are part of the Government’s plan to turn around the economy, as well as ensure economic stability if not growth, these hires are not only short-sighted, but are also economically damaging.