Tuesday, June 10, 2014 – My fellow Saint Lucians, Ladies and Gentlemen, Good Evening.
INTRODUCTION: THE CHALLENGES WE FACE
When I delivered my 2014 Budget Statement in Parliament on Tuesday, May 13th, I set out to explain, as clearly as I could, the challenges confronting our country. If you recall, I stated then that we are facing four, fundamental challenges, namely (1) low economic growth rates, (2) persistently high unemployment, (3) high vulnerability to economic and natural shocks, and (4) fiscal deficits and high debt levels. In that Budget Statement, I also stated the measures that our Government was taking to address these issues.
Tonight, however, I want, in this address, to focus on the fourth of these fundamental problems – our fiscal deficit and our high debt levels. Both of these issues impact the cost of the operations of the Government.
GOVERNMENT OPERATIONS UNSUSTAINABLE
For some time now, Government has been spending much more than it collects in revenue. The result is that Government has had to borrow more and more money to finance its operations. Unfortunately, more of Government’s revenue has had to be directed towards paying salaries to public servants and repaying its debt. This, as most of you would agree, is neither healthy nor prudent. Sadly, we have now arrived at the point where the operations of Government cannot be sustained in the long run without some form of adjustments.
Our administration started to address this growing problem last year with some strong measures. We have had some successes but our successes are not enough to resolve our difficulties. As I indicated during the just concluded Budget Debate, in 2013 we were able to narrow the overall deficit, that is, the difference between the money we make and the money we spend, to $208.8 million, compared to $328.8 million the year before. We reduced the overall deficit-to-GDP ratio to 5.7% from a figure of 9.2% in the previous year. Additionally, we significantly narrowed the current account deficit to $1 million, from $52.6 million in 2012/13.
These adjustments were possible primarily because we undertook a strict streamlining of capital expenditure. We reduced spending on Goods and Services, Utilities, Supplies and Materials, and Communication, in addition to decreasing transfers and subsidies to statutory boards and other government agencies. There was also a major adjustment of $26.8 million in Capital Expenditure. On the revenue side, we realized better revenue performance due to a widening of the tax base, through the implementation of the Value Added Tax or VAT.
Despite these improvements, we are still outside of the recommended ranges. Our overall deficit, which currently stands at 5.7%, needs to be in the region of 3% and lower. Our Debt-to-GDP ratio of 73.6% should be no higher than 60%. Most of the studies that have been done indicate that whenever the debt-to-GDP ratio is higher than 55%, it hurts the growth prospects of the country. Additionally, large deficits and high, unsustainable debt mean that your debt service needs are so large they restrict the money you have available to spend on development programmes. Also, they crowd out private investment, and they bring with them an increased risk of fiscal distress, which, in turn, increases the cost of financing that debt. It is a vicious cycle that no Government wants to find itself in. Unfortunately, this is where many CARICOM countries presently find themselves. These problems are magnified because of the size and openness of our economies, our vulnerability to shocks, and our very limited resource base.
Just look around us for a moment to understand the scale of the problems.
In the past few years, many of our CARICOM neighbors have not been able to pay their debts and had to engage in debt restructuring. Debt restructuring occurred in Dominica in 2004, Belize in 2007 and 2013, Antigua and Barbuda in 2009, Jamaica 2010 and again in 2013 and St. Kitts and Nevis in 2012. Grenada underwent debt restructuring in 2005 and will undergo further debt restructuring this financial year. Indeed, the Government has indicated that investors in Grenada will take a 50% “haircut”, meaning that they have to accept a 50% loss on their investments.
These adjustments have led to a very high degree of caution and wariness about investments in Government Bonds and instruments throughout the region. These anxieties are evident on the Regional Government Securities Market, which is where we have, in recent years, gone to raise most of our financing. This factor is very important because 20% of our debt portfolio matures in the current 2014-15, Financial Year.
So, the most important and urgent question we have to answer is how do we slow down the growth of Public Debt?
THE COMPOSITION OF GOVERNMENT EXPENDITURE
To answer that question we have to look at the composition of Government’s expenditure. For the 2014-15 Financial Year, Current Expenditure accounts for 73% of total expenditure or $870 million, while Capital Expenditure is 27% or $315 million. If we break down Current Expenditure, we will see that spending on Goods and Services accounts for 19% or $167 million, while Interest Payments on debt eat up 16% or $137 million. Transfers to statutory entities make up 12% or $105 million, while Wages, Salaries and Pensions are the largest expenditure item at 53% or $459 million. This means the discretionary expenditure component of our Current Expenditure is relatively small and does not give us much space to manoeuver.
The situation in Capital Expenditure is also very tight. Tourism Marketing is the single largest item, taking up 31% of our Capital Budget or $40 million. We have had to reduce our allocation to Infrastructure to a mere $10 million or 8% of the total, which means the Ministry of Infrastructure will be severely challenged to respond to the many pressing infrastructure rehabilitation and development needs like the repair of roads, bridges, schools and other public buildings.
Already, even with the significant cutbacks we have made to our Capital Expenditure for the current Financial Year, we have a financing gap of $205 million, made up of $129 million on the capital side and $76 million on the recurrent side. In other words, if we stand still and maintain the status quo we will have to raise $205 million in new money for this year.
THE CASE FOR WAGE ADJUSTMENT
This means, unfortunately, that we have to reduce expenditure in the area that is making the biggest dent in our Budget – Personal Emoluments or Salaries and Wages.
Personal Emoluments in the Public Service are currently 13% of our GDP and 53% of Current Expenditure. In effect, for every dollar spent by government, 53 cents is used to pay salaries. Consider a small contractor or a small business or even a large business spending 53 cents on every dollar that it makes, on wages alone. The chances are that business would not make a profit or for that matter, survive for any length of time.
The harsh truth is that the growth in Wages and Salaries in the Public Service over the last ten years has not only been completely disconnected to the growth in our economy, but it has far outpaced the growth in wages in the Private Sector. Indeed, between 1997 and 2013, a span of sixteen years, public officers would have received an overall increase of 39.5% in salaries and wages.
Against that background, I can now address three issues that have been championed by some of our citizens.
DO WAGE INCREASES STIMULATE ECONOMIC GROWTH?
Some have suggested that there is an economic benefit to these wage increases and that our economy grows when we increase wages in the Public Service. However, the data and the literature suggest differently. Government spending on wages is consumption and the consumption-to-import ratio is high in small open economies like ours. In other words, when we increase consumption the only real beneficiary is the external market and those who import the items. Government does collect more in Import Duties but the value added through this process is minimal and there is no real production or significant impact on our GDP.
In fact, the studies show that Government spending on consumption has almost no impact on growth in small open economies. Similarly, consolidation or restriction on the investment side hurts the growth prospects of the country and is not viable. Common sense suggests that growth should lead wages and not the other way round.
SHOULD WAGE CUTS BE RESTRICTED TO UPPER MANAGEMENT?
The other recommendation you hear is that a wage reduction, if indeed it has to take place, should be restricted to Ministers, Permanent Secretaries and Senior Management.
Again, the reality paints a different picture. The structure of the Public Service has changed very little over the last ten years. Civil Servants account for 31% of total expenditure, followed by Teachers at 20%, Public Service Pensioners at 19%, Police at 10%, workers on wages at 9%, Fire Service Officers at 3%, Nurses at 2%, Correctional Officers at 1%, Doctors at 1%, Top Management at 1%, and 3% categorized as ‘Other’. The ‘Other’ category is made up of officers who are working on Projects, Members of Parliament, Judges and Magistrates, District Registrars, Special Police assigned to protect our Judiciary, Officers in the Electoral Department, and the so-called consultants, a total of 13.
Let us take the roughly $7,761 monthly salary paid to a Minister of Government as a benchmark. As explained earlier, between 1997 and 2013, Public Officers have received salary increases amounting to 39.5%. However, the salaries of Ministers have remained unchanged since 1998. This is why every Grade 19 Public Officer, or everyone at the level of Deputy Permanent Secretary, currently makes over $10,000 annually more than a Minister. That gap gets much wider when you compare the salaries of Ministers and Permanent Secretaries. So the suggestion that by taking a bigger chunk out of the salaries of Ministers or reducing the number of Ministers we can solve or help solve our fiscal problem is at best misguided and at worst, innumeracy.
But let us go further. If we eliminate all of the salaries from the level of Minister upwards, we would save a grand total of $16.5 million. In effect, we would send home all of the Ministers, all of the Permanent Secretaries, Deputy Permanent Secretaries, Doctors, Magistrates and Heads of Department to realize a saving of less than $17 million. Clearly, the mathematics does not support the political arguments. The facts show that employment in the Public Service is skewed toward the lower grades, with Grades 3, 5, 7, 9, 10 and 12 accounting for the largest numbers.
WRONG TIME TO REDUCE DEFICIT
Then there are those who say that this is the wrong time to reduce the deficit. This is the time to pump money into the economy.
Surely, by definition, if a deficit exists it means that you are unable to finance your expenses from the money you make. Therefore, you may have to borrow. The reality is twofold; firstly the Debt/GDP ratio of Saint Lucia is already high. Secondly, investors no longer have any appetite to lend Governments in the region on a long term basis. In other words, it is no longer possible to borrow from investors as in the past. We can no longer borrow to finance our deficit; that is our bottom line. So, we have no choice but to reduce our current expenditure.
THE AVAILABLE OPTIONS
Therefore, unfortunately, the only way in which we can get the reduction in Current Expenditure that we need to put our fiscal situation back on a viable path is to make a cut in salaries and wages across the board.
Three different scenarios were developed. The first seeks to achieve a savings of $37 million, which, if you will recall, is slightly less than half of our Recurrent Financing gap. To realize these savings, we would need to make a 10% reduction in salaries and wages across the board or send home a total of 990 Public Officers. The second option, which would give us savings of $26 million, would require a 7% reduction in salaries and wages or the retrenchment of 696 workers. However, it would still leave a financing gap of $50 million. The third option is for a 5% adjustment in salaries and wages, which gives savings of $18.5 million, but leaves a financing gap in Recurrent Expenditure of $57.5 million. If the decision is not to embark on a 5% wage adjustment, we would have to terminate the employment of 495 workers.
We have said to the Unions and Associations that Government does not want or intend to retrench any workers unless it is placed in a position where it has no other option. We already have a high unemployment problem to deal with and sending workers home only worsens that situation. We think this is a time when all should be willing to make a small sacrifice to preserve the jobs of their fellow workers.
A SPIRIT OF ENGAGEMENT
My fellow Saint Lucians, these are the realities that our Government has been explaining to our Civil Society partners in a series of meetings over the last month. These are also the facts that we have been sharing with our Public Sector Unions in the several meetings that have taken place in the Conference Room of the Ministry of Infrastructure. I know that these discussions are not easy. They cannot be, necessary as they are!
I want to thank the Public Sector Unions and Associations for the spirit in which they have engaged our Government in these discussions. So far, the meetings have been free of rancor and full of constructive discussion. We have looked at ways in which we can stimulate growth in our economy in the long run. We have discussed ways in which we can reduce expenditure on electricity, communications, and the operations and maintenance of our vehicles and we have shared with the Unions and Associations the steps and programmes that we have already undertaken in these areas.
Similarly, when we met with the National Youth Council, the Media Association and the National Council on Public Transportation, we had lively, constructive dialogues on all of these issues. We spoke about stimulating agriculture and creating new spheres of economic activity. This week we will meet with the Industrial and Small Business Association to continue the discussions.
I wish to reiterate that together with the team from the Ministry of Finance, my cabinet colleagues and I are available to any Civil Society Group that wishes to be similarly briefed on the economy, once appropriate arrangements could be made. Indeed, I intend to continue these discussions on a regular basis with all our social partners to report on our progress on the economy and of course, to seek their advice and counsel.
THE NEXT STEPS
At our Meeting on Friday June 6th with the Public Sector Unions and Associations, I presented the Government’s proposals to reduce the fiscal deficit. We have agreed that the Unions will take these proposals back to their membership, obtain their feedback, and our meeting will reconvene on Friday June 13th to receive the formal responses and reactions of the Unions and Associations.
At that meeting, I informed the Unions and Associations that consistent with the process we have embarked on in apprising Civil Society of the current situation, I would be addressing the Nation tonight to extend the conversation to the wider public. Initially, I grappled with the dilemma of whether I should share with you the proposals the Government made to the Unions and Associations or whether I should at least give their leaders an opportunity to engage their workers before putting these proposals in the public domain.
I did not want to be accused of preempting the consultation process or muddying the waters for the Union leaders. However, I felt that this matter could not be confined solely to the Government and Public Sector Unions and Associations. It had to embrace the entire public because all of us are called upon to make a sacrifice of some kind. In any event, I knew that Government’s proposals, as outlined in the letter to the respective Union leaders, would be out in the public domain. Already, I have heard at least one media outlet present these in detail in their news broadcast. Therefore, the debate over whether or not I should state them tonight is, for all practical purposes, now moot.
Let me now turn to the proposals which the Government has formally tabled to the Public Sector Unions and Associations. The Government has proposed the following:
1. A reduction of 5% in the wages of Public Officers and all other employees of the Crown, from Grades 4 to 21. This reduction will be levied on gross salaries that is, basic salary plus allowances. The reduction will not apply to the judiciary or the Governor General.
2. The introduction of a wage freeze to cover the current triennium of wage negotiations.
3. The introduction of agreed benchmarks to govern further wage increases. To ensure and maintain sustainability, it is proposed that wage adjustments beyond the current triennium should be related to broad macro-economic and fiscal indicators. These should include:
(a) GDP Growth Rate of 2.5%;
(b) Achievement of a Current Account Surplus
of 3% of GDP;
(c) An agreed level of inflation;
(d)The unemployment rate;
(e) The level of wages in the overall economy as measured by the wage index; and
(f) Agreed productivity gains.
4. A Memorandum of Understanding to be signed by all parties to the Agreement to reflect the points of agreement.
5. The establishment of a Monitoring Committee, made up of representatives of the Government and all Public Sector Unions and Associations, to monitor the implementation of the Agreement between the parties.
6. The establishment of a Commission, to be known as a “Spending and Government Efficiency Commission”, to advise Government on the most efficient and cost-effective government organizational structure and governing processes. The Commission shall:
(1).Review, assess and propose changes to Government and Government corporate bodies and agencies with respect to:
(a) the adequacy of the structures in place;
(b) operations; and
(c) processes for governing;
(2) Review, assess and propose a redesign of the organizational structure of Government in such manner as the Commission may deem appropriate, which may include streamlining or consolidating agencies, authorities and other bodies that have overlapping missions;
(3) Identify operational improvements aimed at cost-effectiveness and improved service quality, which may include shared services, enhanced use of information technology and changes in service delivery mechanisms;
(4) Identify inefficiencies;
(5) Identify actions that can be privatized or
(6) Identify targets and other means for
measuring efficiencies; and
(7) Do all things the Commission may deem necessary to achieve the objectives of the work of the Commission.
The idea of a “Spending and Government Efficiency Commission” is not original. In fact, we have borrowed the idea from Bermuda, an island that had to undergo structural adjustments, including wage adjustments in its Public Service.
NEED FOR STRONG SIGNALS
Fellow citizens, ladies and gentlemen, what we do next as a country will be very critical. All around us we are seeing the carnage that the global Economic Crisis has left behind. There is scar tissue in many areas that will take a long time to fully heal. While we are starting to see evidence of recovery in some sectors, the situation is still very fragile and precarious. We must send the correct, strong signals to the market and to potential investors that we are serious about restoring our economic fundamentals. We cannot ask investors to trust us with their hard-earned capital if we are not prepared to put our own financial house in order.
In my message in our 2011 Elections Manifesto, I stated “the goal of nation building is a long-term exercise” and “we understand there are no quick fixes to several of the problems facing (our country)”. We must without fail, summon the will and courage to resolve our problems.
WHY SUCH A POLITICAL RISK?
Many people have asked me why are we taking such a huge political risk? Why are we embarking on a course of action that may ultimately weaken our Party’s chances at the next General Elections?
There are many who believe that we should not invest so much in correcting our economy. They reason that there is no certainty that the economy will crash if we continue as is, and in any event, given that it is our political future that is at stake, it is a gamble our Government should not take. However, the Government that I lead does not believe in gambling with the future of our country and its people. We were elected to lead, to govern and to take decisions that are in the best interests of the entire country, not just a few, even if those decisions are uncomfortable and painful. The men and women who serve with me in the Cabinet are not selfishly motivated to put their own political interests over the interests of the country in which they live, their parents lived, and their children and grandchildren expect to live prosperously.
This is why we are prepared to trust in the people of Saint Lucia. This is why we are inviting our Public Sector Union leaders and our Public Officers to do the right thing, to do what is in the best interest of our country.
We believe in the integrity and the reasonableness of our people.
I am confident that if we do what is right, our country will emerge from this stronger, more focused, more resilient and with a determination to never find ourselves in such a situation again.
I pray that God may bless each and every one of us and grant us the strength and the courage to confront these problems squarely and put them behind us.
Thank you and good night.