Public payroll gets a bump despite reform promises

Last week the government and trade unions inked an agreement granting civil servants and public-sector workers a 1.5 per cent salary bump. The move raised eyebrows, given that only recently the government had promised to rationalise the public payroll, even hiring consultants from the IMF to come up with proposals. The 1.5 per cent hike itself won’t break the camel’s back; it’s the general upward trend in payroll spending that has some worried.

Finance Minister Makis Keravnos had said he’d reform the public payroll by linking pay rises to GDP. Then came the deal of July 18, where public-sector employees got a blanket 1.5 per cent salary increase. This fixed, across-the-board pay hike is on top of the automatic annual increments and the Cost of Living Allowance (CoLA).

It therefore appeared to contradict the administration’s stated policy, and made it look like the government had caved in to union pressure.

But the goverment doesn’t see it that way. Giorgos Panteli, permanent secretary at the finance ministry, told us that the IMF study – commissioned by the government – focuses on restructuring the public payroll, and deals with matters like rationalising paygrades on a long-term basis.

“The 1.5 per cent hike was across-the-board, so it’s different,” said Panteli.

Asked when they expect the IMF to deliver the final draft of the study, the official estimated it at around the October timeframe. To date, the consultants have presented only preliminary findings and recommendations.

In early July, a team of visiting IMF experts met with parliamentarians here and conveyed their thoughts about how to rein in the public-sector payroll. It was reported at the time that the IMF proposes increasing productivity, for example by doing away with CoLA as well as the 13th salary and offering automatic pay increments bi-annually instead of every year, as is the case now.

The IMF is said to believe that public salaries in Cyprus are significantly higher compared to other European countries, and that a great deal of public servants do not perform adequately given their remuneration. Their preliminary findings also argued that there is a large wage gap between the public and private sector.

Depending on whom you ask, the recent 1.5 per cent salary bump will cost the treasury an extra €40 million to €60 million. But it’s a drop in the ocean when compared to how the public sector wage bill has been growing in recent years.

Michalis Antoniou, director general of the Employers and Industrialists Federation (OEV) points out that from 2019 to 2024, public payroll went up by a staggering 37 per cent – from €2.7 billion to €3.7 billion.

“That works out to €1 billion extra, averaging out at €200 million a year,” he tells the Cyprus Mail.

The businessman surmises that the current €3.7 billion payroll may be the highest ever in absolute numbers. Still, it doesn’t rank as the highest as a percentage of GDP or the state budget – not even close.

“Look, in 2024 the payroll (as stated in the budget) rose 15.4 per cent compared to actual payroll expenditures in 2023,” he offers.

“Now consider that this 15.4 per cent is on top of the 11.6 per cent rise in the wage bill between 2022 and 2023. These are rates that the real economy can’t handle. Moreover, pay rises in the public sector are inelastic.”

OEV’s position is clear: they disagree with any moves that inflate the public payroll as a percentage of GDP and/or the state budget.

“But if – and I stress if – the IMF did say to abolish the 13th salary, we don’t agree. This is no time to slash salaries, we understand that. What we do want, for example, is to reform CoLA, and here we do see eye to eye with the IMF.

“Bottom line, the state machinery must be productive. We want a reorganisation of the bloated public sector, a new organisational structure. Some services – like IT – could be farmed out to the private sector.”

And according to Antoniou, there’s a great deal of ‘fat’ that can be cut. He explains:

“Far smaller numbers should be employed in the public sector. However, the people who’d remain would get paid well, to discourage ‘poaching’ from the private sector. And in this drive to downsize, the government could also roll out voluntary early retirement plans.

“We don’t want anyone to be victimised, to lose their job. Nor are we against public sector workers getting a raise. What we’re about, is linking productivity to salary increases.”

What might happen should the present trend continue? Simply put, if GDP growth cannot fund the public payroll, unpopular measures will inevitably follow: either higher taxes or a cuts to benefits.

“Also,” adds Antoniou, “in the event of an economic downturn, with smaller tax receipts for the government and therefore deficits, the state may have to resort to borrowing, which in turn could downgrade the country’s sovereign credit rating.”

The OEV boss also recalls that a few years ago the government and the civil servants’ main union Pasydy struck an agreement where increases in payroll would not exceed the rate of GDP growth.

“It seems this arrangement has fallen by the wayside, forgotten,” he remarks.

The considerable uptick in the public-sector wage bill in recent years is partly explained by another deal between the government and Pasydy dating to 2018. Here, the two sides agreed that the salary cuts of 2011 to 2014 would be gradually rescinded by early 2023. In short, salaries would be reinstated to their pre-crisis levels.

Reforming the public payroll is a longstanding issue of concern, regardless of the 2013 financial meltdown or the subsequent commitments made to the ‘troika’ of international lenders.

A major headache is the so-called combined payscales. These are payscales that feature several bands, so that a civil servant can double their salary without ever getting promoted.

To illustrate: the A2, A5 and A7 combined payscales carry with them 29 such bands, or increments. So, an employee starts with an annual salary of €15,100, and after 29 years of service their remuneration reaches €39,000 – a 125 per cent increase.

All the while, the employee in question carries out more or less the same functions. As pointed out by many observers, this situation disincentivises productivity.