Public Sector Salaries Could Make Tempting Target for Budget Cutters

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During its four-year term, Prime Minister Benjamin Netanyahu's government awarded pay raises to public-sector workers that total NIS 15 billion to NIS 16 billion over the life of the contracts.

One of the first tasks of whatever government emerges from the January 22 election will be to close a gaping NIS 20 billion hole in the 2013 budget. In that context, the next prime minister, likely to be Netanyahu as well, will have to weigh whether the years of generosity are now in the past and some retrenchment is in order.

The gap between projected income and outgo in the 2013 budget will likely be covered by cuts of NIS 3 billion in defense spending, NIS 2 billion in child allowances and NIS 2 billion in deferred infrastructure projects.

Another NIS 3 billion to NIS 5 billion of the NIS 20 billion hole will come from higher taxes. Some of these have already gone into effect, and others are scheduled to be imposed from January.

Public-sector salaries are another obvious target for cost cutting. But that won't be easy to achieve - and some economists say the government can close the gap without taking on the labor unions.

Big bill for wages

The public-sector wage bill is significant - NIS 120 billion to NIS 130 billion, out of a total 2013 budget projected to be about NIS 300 billion. But that NIS 300 billion total excludes "automatic pilot" elements such as contractual wage increases the government must cover in coming years. The cost of these wage increases will likely inflate spending next year to NIS 314 billion, a 10% increase from this year.

Under the wage hikes approved by the Netanyahu government, teachers are expected to get an extra NIS 1 billion to NIS 1.5 billion annually, doctors another NIS 2.5 billion, and nurses NIS 650 million more. Raises for university lecturers, social workers and attorneys in the State Prosecutor's Office add another NIS 600 million or so to the bill.

The latest addition to the list are people employed by the government through private contractors, whose wage agreement the government approved yesterday. That will add some NIS 1.4 billion annually to total government compensation coasts.

Omer Moav, an economist at the Hebrew University of Jerusalem, said Netanyahu and his finance minister, Yuval Steinitz, projected weakness in the face of labor unions, and the result was irresponsible fiscal policy.

"It's nice that the government is increasing spending, but in the end it comes at the expense of the public," Moav told TheMarker. "The Netanyahu government, instead of thinking responsibly about reordering [fiscal] priorities, simply poured more and more money out."

Michel Strawczynski, who heads the Economics and Society Program at Jerusalem's Van Leer Institute, said one of the most traumatic incidents in Israeli economic history was the 16% rise in public-sector salaries in 1993-94, which resulted in taxes having to rise by some 7% as the budget deficit ballooned.

But Strawczynski said he doesn't expect that to happen again, despite the Netanyahu government's generosity in recent years.

"In the current situation, it doesn't appear that the impact of the wage increase will be so great as to endanger the economy and bring higher inflation," he told TheMarker. "The government succeeded in raising taxes before the election and the fiscal situation, on the whole, is under control."

Strawczynski said that at least some of the wage increases were justified. Some categories of state employees, such as social workers, contract workers and teachers, are so poorly paid as to be counted as low-income groups. "In the case of the teachers, many people agree that a relative correction in salaries was needed," he said.

The government is committed to keeping to the collective labor agreements it signed, and unions will fight any effort to pare back or delay wage hikes to their members. The next finance minister could try an across-the-board salary cut for the entire civil service, but that it also likely to encounter fierce resistance.

Netanyahu still a fiscal hawk

When he was finance minister back in 2003, Netanyahu sought deep fiscal cuts, which he billed as "stimulating growth." Moav doesn't think Netanyahu has become any less of a fiscal hawk, but said he no longer practices what he preaches.

"Netanyahu's colors haven't changed, but there is a big gap between his ideology and what he does in practice," he noted.

But more than cutting salaries, Moav said, the way to achieve a more efficient civil service is through more flexible contracts.

"Labor groups that conduct negotiations through strikes and blackmail create a situation in which wages are determined only by who can inflict the most pain, not by parameters such as ability and education," he said.

Benjamin Netanyahu.Credit: Reuters

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