The views expressed are those of the author(s) and do not necessarily represent those of the Department of Budget

and Management.

Personal Services Profile of the National Government

By Ms. Gisela C. Lopez and Mr. Rolando U. Toledo April 18, 2005

Abstract

Personal Services accounted for 6.1 percent of GDP during 1986-2005 (simple average). As a percent share of the total budget, it accounted for 31.8 percent for the same period. It also accounted for 38.1 percent of total revenues net of privatization proceeds during the period under consideration. Given existing resources, the national government, if it grants a salary increase, will be faced with a decision to either raise the deficit or cut other non-interest expenditures.

Personal Services Profile of the National Government

Personal Services Profile of National Government Employees

Introduction It has been almost four years now since the last salary increase for government workers. The issue on salaries and wages both in the private and public sectors has been put to the fore given recent developments such as increasing inflation rates, the much anticipated negative impact of the VAT measure on prices of commodities, recent and future increases in power rates, and the spiraling oil prices in the world market. All these have negative impact on the incomes of all employees. At the government sector, there has been pressure to provide an across-the-board salary increase of P3,000 per employee. This has been the stand of COURAGE (2000) when the government announced the implementation of a five percent salary increase for 2001. During the launching of the Department of Budget and Managements (DBMs) 1ST Procurement Service and 1ST Government Employees

Commissary in Mindanao in Davao City, the DBM Secretary announced that the government is ironing out a proposed l0% salary increase for state workers (Palacio 2004, p.1). However, it was emphasized that due to fiscal constraints, any salary increase should have accompanying revenue measures duly legislated by Congress. Salary upgrading is usually aimed at ensuring that employees are paid higher salaries, better motivated and thereby, becoming more efficient in the performance of their duties. This supports the argument that a higher or competitive salary is one of the major considerations in order to recruit quality personnel, encourage productivity and avoid corruption. Moreover, any salary increase in the public sector may affect the wage policy of the private sector. Conversely, any increase in the wages of private sector employees may also affect the wage policy of the government sector.

Personal Services Profile of the National Government

Heller and Tait (1983, p. 6) in a study on government pay indicated that a principal motive for analyzing the size of government is the belief that government employment and wage policies have critical implications for wage determination throughout the economy. The same authors (Heller and Tait 1983, p. 6) further indicated that the larger the government share of employment, the more likely it is to dominate wage rates and awards not only for public sector employees but for the private sector as well, and thus to have a significant degree of leverage. This paper focuses on the trends of Personal Services (wage expenditures) of the national government particularly in relation to existing revenues of the national government. It presents the impact of certain salary increase scenarios. It also presents the trends in manpower of the national and local governments and government corporate sector. However, it only looks at the wage expenditure profile of the national government (excluding government owned and/or controlled corporations or GOCCs) at the aggregate level. The paper does not distinguish between skill groups, between occupational groups and between sectoral groups in the bureaucracy. It does not deal with compression ratios as well as present statistics by department. One major limitation of the study is the dearth of information and studies relative to private sector pay. Another limitation is the absence of pensions data earlier than 1997. Hence, in the discussions, distinction is made between PS with pensions and PS without pensions whenever relevant. Otherwise, PS definition, which is inclusive of pensions, is being used. Revenue and Expenditure Trends The budget deficit, which is largely due to low revenue collections, is the major reason why a general salary increase cannot be granted to government employees at this time. Figure 1 shows the gaping difference between expenditure and revenues. Revenue as a proportion to GDP has been falling since the Asian crisis in 1997 until 2003 where the free fall was arrested

Personal Services Profile of the National Government

through the implementation of solely administrative measures. Revenue effort has fallen from as high as 19.9 percent of GDP in 1994 to 14.4 percent in 2004. Cognizant of the fiscal situation, revenue measures through legislative means have been deemed very imperative. Thus, some P80.0 billion worth of legislative tax measures were included in the Medium Term Philippine Development Plan (MTPDP) as part of the current administrations strategy to address the fiscal problems. These are enumerated in detail in one of the sections of this paper.

Fig. 1. National Government Fiscal Position, 1986-2004 22 20 percent of GDP 18

deficit
16 14 12
19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 6 19 8 19 8 7

Expenditure

Revenue

Source: DBM

Disaggregating revenues into tax and nontax collections, the chart below shows the declining trends as percent of GDP (Fig. 2). These revenue collection trends impact largely on the ability of the national government to grant salary increase.

Personal Services Profile of the National Government

Fig. 2. Tax and Nontax Collections, 1986-2004
18 16 14 (percent of GDP) 12 10 8 6 4 2 0
19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

Tax

Non-Tax

Source: DOF

As a share of GDP however, expenditure trends on an obligation basis have been erratic (Fig. 3). The highest was registered in 1990 and the second in 2000.

Fig. 3. Expenditure Trend, 1986-2004 21

(percent of GDP)

20

19

18

17
19 88 19 92 19 94 19 96 19 98 20 00 20 02 19 90 19 86 20 04

Source: DBM

The increase in government expenditures is largely due to the growth of interest expenditures and transfers to local government units (LGUs), rather than in the core areas of government. The breakdown by sectoral

Personal Services Profile of the National Government

categories shows that interest expenditures are squeezing other sectors starting 1998 (Fig. 4).

100 90 80

Fig. 4. Sectoral Allocation of National Government Expenditures, 1986-2004

(percent distribution)

70 60 50 40 30 20 10 0

Economic services Defense Interest Payments and Net Lending

Source: DBM

In contrast, economic services share has been declining in nominal terms since the Asian crisis. Trends in Manpower Given limited resources and the growth in the share of interest expenditures and transfers to LGUs, the national government has sustained its policy of limiting the creation of permanent, casual and contractual positions over the years to contain manpower growth in the public sector (Fig. 5). The implementation of austerity measures, which include the freeze hiring policy, has been undertaken to help contain government manpower. For 2005, the number of authorized positions is at 1,150,681. This level reflects a slight reduction in the total number of authorized positions compared to 2004 of 1,150,730.

19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

Social services Gen. Public Service

Personal Services Profile of the National Government

Fig. 5. Authorized Positions in the National Government, 1996-2005 1200000 1150000 1100000 1050000 1000000 5 4 3 2 1 (in percent)

950000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Number of authorized positions
Source: DBM

Growth rate

Aggregating employees at the national and local governments and corporate sector, for 2005, the number of authorized positions is at 1,636,213 (Table 1).

Based on the projected population, public servant (inclusive of national and local government positions) to population ratio in 2004 is 1:51. For 2005, the ratio is likewise set a 1:51.
Table 1. Number of Authorized Positions, 2004-2005 Particulars 2004 National Government* 1,150,730 LGUs** 390,561 GOCCs*** 94,971 Total 1,636,262

2005 1,150,681 390,561 94,971 1,636,213

Memo items: Projected population*** Civil servant:population ratio

Sources: * DBM ** CSC data as of December 1999 *** NSO Data

82,663,561 1:51

84,241,341 1:51

Trends in Personal Services or Wage Expenditures Hewitt and van Rijckeghem (1995 cited IMF 1983) defined wage expenditures as all salaries, bonuses, and cash allowances to workers contained in current

Personal Services Profile of the National Government

expenditures for service rendered including payments to military personnel. Other literatures also use wage bill defined as the sum of wages and salaries, which consist of all payments in cash but not in kind, to employees in return for services rendered, before deduction of withholding taxes and employees pension contributions paid to civilian government and armed forces (Radwan 2000). In this paper, these terms are used interchangeably with Personal Services. It excludes non-monetary benefits such as free meals and expected future benefits such as pensions. It excludes non-monetary benefits such as free meals. However, as mentioned earlier, expected future benefits such as pensions are included due to the absence of a more disaggregated data particularly for years earlier than 1997. Allocation for Personal Services (PS) remains as one of the biggest single expenditure item in the governments budget next only to interest payments, at least for 2005. For the period 1986-2005, its average share is at 31.8 percent (Fig. 6).

Fig. 6. PS Share to Revenue/Budget PS 350.00 300.00 250.00 200.00 150.00 100.00 50.00 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Personal Services % to Revenues % to NG Budget % 56.00 48.00 40.00 32.00 24.00 16.00 8.00 -

Over the years, the allocation for PS had grown at an average rate of 11.1 percent, growing faster than the growth of the total budget and total revenue at the rate of 9.8 percent and 9.5 percent, respectively.

Personal Services Profile of the National Government

In 1998, PS grew by 14.8 percent over the 1997 level. Its highest share was registered at 38.2 percent in 1998 when the Salary Standardization Law II (SSL II) was implemented. The implementation of SSL II required about P90.0 billion from 1994 to 1997. SSL II aims at rationalizing the compensation structure through the provision of a single pay plan for all classes of positions and integrates allowances in the basic salary. It also aims at improving the job design and career ladders through the reduction of differentiation and position levels and creation of progressive career paths for highly specialized positions and also improving salary levels by making government compensation competitive with that of the private sector. However, some GOCCs were able to get exemptions from the law through legislation. These include the Bangko Sentral ng Pilipinas, National Power Corporation, Land Bank of the Philippines, Philippine Postal Corporation and the Government Service Insurance System. Hewitt and van Rijckeghem (1995 p. 5) observed that among industrial countries, wages averaged 15 percent as a share of central government wages compared to 27 percent for developing countries. The 2005 PS share of total budget of about 32 percent is higher than the average of developing countries of 27 percent. Another round of salary increase was granted in 2000 i.e., a 5.0 percent across-the-board for all employees. Certain occupational groups were also granted salary increase by way of separate legislations such as the PNP reorganization law which mandates the increase in salary rates of policemen. As a share of GDP, PS has hovered at an average of 6.1 percent for the period 1986-2005, higher than interest payments share of GDP at 4.9 percent (Fig. 7). Notwithstanding this, its relative involvement in the economy compares well with the results of a study by Hewitt and van Rijckeghem (1995 p. 3) which showed that wage expenditures of central governments or national governments averaged over 7.0 percent of GDP from 1980 to 1990 using unweighted data. It noted that industrial countries averaged about 5.5

Personal Services Profile of the National Government

percent of GDP compared to developing countries of 7.5 percent. During the period 1981-1990, the Philippines PS as a percent of GDP averaged at 4.7 percent. Moreover, the study by Heller and Tait (1983, p. 10) showed that central government wages as a share of GDP registered a higher share in developing countries (7.9 percent of GDP) than in OECD countries (5.2 percent). The range of wage bill as a share of GDP lies between 4.0 and 8.0 percent of GDP for the period 1976 to 1982.

Fig. 7. Personal Services, 1986-2005

50 18

45

15

(share to total budget and total revenue)

40

12

35

30

25

20
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenue Share net of Pension Share of GDP

Share to Total Revenues (Net of Priva.) Share of GDP net of Pension

Source: DBM

Compared with its Asian neighbors such as Indonesia, Malaysia, Thailand and Singapore, the Philippines PS as a share of GDP is the highest at 6.5 percent (Fig. 8). The lowest is that of Indonesia at 1.7 percent.

(percent of GDP)

10

Personal Services Profile of the National Government

Fig. 8. Personal Services, Selected Asian Countries
7 6 5 4.1 4 3 2 1 0 Philippines 2003 Indonesia 1999 Malaysia 2003 Thailand 2003 Singapore 2002 1.7 6.5 6.0 5.5

Source: IMF-GFS, DBM

As a percent of tax collections, the Philippines has the highest ratio for the years 1995 to 2001 compared to Thailand and Singapore (Fig. 9). This means that for 1995-2001, for every P1 collected, about P0.41 is used to pay for government employees. Singapore and Thailand on the other hand, used only about P0.32 and P0.38, respectively.

(percent of GDP)

50

Fig. 9. Personal Services, Selected Asian Countries, 1995-2001

45 (percent to tax collections)

40

35

30

25 1995 1996 1997 Philippines 1998 1999 2000 Singapore 2001

Thailand

Source: IMF-GFS

PS

consists

of

salaries,

wages,

entitlements

and

other

compensation/benefits/allowances. Entitlements include the retirement and

11

Personal Services Profile of the National Government

life

insurance

premiums

(RLIP),

terminal

leave

benefits,

PAG-IBIG

contributions, medicare premiums and employees compensation insurance premiums (ECIP). Other benefits include, among others, the following: a) personnel economic relief allowance (PERA); b) additional compensation (AdCom); c) representation and transportation allowance (RATA); d) overtime pay; e) year-end bonus and cash gift; f) clothing and uniform allowance; g) productivity incentive benefits (PIB); h) honoraria; i) subsistence allowance; j) laundry allowance; k) quarters allowance; and l) hazard pay. While government employees only enjoyed a few rounds of salary increases, there were also improvements in terms of benefits. A matrix showing benefits given by administration is shown below (Table 2).

Table 2. Allowances and Other Benefits Marcos Particulars Admin.

PERA

Aquino Admin. P500 per mo. For appointive positions with SG23 and below

Ramos Admin. P500 per mo. For all appointive positions

Estrada Admin.

AdCom overtime pay

Hourly rate based on actual monthly salary or P300 whichever is lower P625 per mo. 1 mo. Salary + P1,000 P300 per year Actual hourly rate

P500 per mo. 125 to 150% of actual hourly rate

RATA (e.g., Division Chief position) year-end bonus and cash gift clothing and uniform allowance PIB

P2,200 per mo.

P4,000 per mo. 1 mo. Salary + P3,000 P2,000 per year P2,000 per employee per year 1 mo. Salary + P5,000 P4,000 per year

P1,000 per year

12

Personal Services Profile of the National Government

As argued by government employees unions, their salaries have been deteriorating in real terms. As shown in Fig. 10, per capita salary in real terms has been relatively stable and flat for the period covered. Its level is however lower in 2005 compared with 2004. and is starting to fall in 2005.

Fig. 10. Per Capita PS, Nominal vs. Real, 1986-2005

300,000 250,000

(in pesos)

200,000 150,000 100,000 50,000 0

00 96 97 87 03 98 90 93 89 99 86 92 95 19 20 02 88 91 19 19 20 20 20 19 19 19 19 19 19 19 19 19 19 19 20 20 05 94 01 04

Per Capita PS

Real Per Capita PS

Source: DBM, NSCB Note: IPIN based on 1985 prices

Public-Private Wage Differential In 1997, the DBM conducted a nationwide survey of salaries and other compensation practices in private industry relative to the memorandum of the then President Fidel V. Ramos on the Study on New Pay Hike for the Public Sector which has been directed, among others, to fast track the implementation of a compensation study, including salary survey in the private sector, to address inequities in compensation among government personnel and raise compensation rates to a level that will attract highly competent workforce. The findings of the study were as follows: 1. The average basic salary of comparable jobs in the private sector is about 14.0 percent higher than those for the survey key classes representing sub-professional level government jobs (SG-1 to SG 9) and is about 4.0 percent higher than those for the survey classes
13

Personal Services Profile of the National Government

representing professional level government jobs (SG-10 to SG-19) (Table 3). 2. The average basic salary of counterpart position in the private sector for supervisory positions in government represented by survey key classes Division Chief and Department Chief is higher by 81.0 percent and 176.0 percent, respectively. The average basic salary of counterpart positions in the private sector for top management/executive level positions in government represented by key class Chief Executive Officer (Bureau Director) is higher by about 634.0 percent.
Table 3. Comparison Between the Private Sector Rates and Public Sector Rates Private Sector Difference Salary Grade 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 18 19 24 25 28
Source: DBM

1997 Survey Rate (in pesos) 71,768 75,780 80,017 84,490 89,214 94,202 99,468 105,029 110,901 117,101 123,648 130,561 137,860 145,567 153,705 162,298 180,953 191,069 422,800 669,723 2,001,707

Present Rate as of 1997 56,856 61,980 67,560 72,960 78,792 85,104 91,056 97,428 104,256 111,204 117,864 124,944 132,432 140,388 148,800 157,740 177,240 187,872 232,968 242,292 272,544

Level (in pesos) 14,912 13,800 12,457 11,530 10,422 9,098 8,412 7,601 6,645 5,897 5,784 5,617 5,428 5,179 4,905 4,558 3,713 3,197 189,832 427,431 1,729,163

% 26.2 22.3 18.4 15.8 13.2 10.7 9.2 7.8 6.4 5.3 4.9 4.5 4.1 3.7 3.3 2.9 2.1 1.7 81.5 176.4 634.5

14

Personal Services Profile of the National Government

In general, public sector pay was found to be significantly lower than private sector pay particularly for those holding managerial or supervisory positions. Salaries of professional and sub-professional positions are slightly behind that of the private sector by about 9.0 percent and may still be considered competitive. In terms of ratio of the average PS per government employee to GDP per capita which measures the relative pay of government employees for 2005, PS is approximately 4.07 times the per capita GDP (Fig. 11). This compares well with India and Korea, which have the largest ratios of 4.8 (Heller and Tait 1985, p. 17). However, the years covered in their study were earlier than 1986.

Fig. 11. Ratio of Average Wage Per Employee to Per Capita GDP, 1986-2005 6 5 4 3 2 1 0
19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

Source: DBM

The study also indicated that the public sector might have seem to be a somewhat privileged group (Heller and Tait 1985, p. 18). Medium Term Fiscal Program As embodied under the Medium Term Philippine Development Plan 2004-2010 and consistent with its fiscal consolidation and deficit reduction strategies, the

15

Personal Services Profile of the National Government

national government aims at balancing the budget by 2010 (Fig. 12). The budget deficit of the national government is expected to balance by 2010. The consolidated financial position is also targeted to decline as a percent of GDP from 6.0 percent to 1.0 percent by 2010. These objectives are envisaged to be achieved from a combination of both revenue and expenditure measures. The desire to achieve these objectives has been manifested in the recent announcement by the national government to lower further the national government deficit target for 2005 from 3.6 percent of GDP to 3.4 percent of GDP.

8 7

Fig. 12. Medium Term Deficit Targets

6.0 6 (percent of GDP) 5 4 3 2 1 0 2004 2005 2006 2007

NG Deficit

5.3 4.2 3.6

5.3 4.6 3.9 2.9 2.1 1.2 0.2 2008

CPSD

3.0

1.0 0.0

2009

2010

Source: MTPDP 2004-2010 Note: 2004 numbers were changed to reflect actual levels

As indicated in the MTPDP, the following administrative and legislative expenditure measures are being pursued by the DBM: 1. Austerity program Administrative Order No. 103 was issued on August 31, 2004 which mandated government entities to implement austerity measures including a freeze in hiring. 2. Rationalization of personal services A rationalization of the

16

Personal Services Profile of the National Government

bureaucracy shall be implemented. Savings from the rationalization program will be used to fund salary adjustments and the 10-point agenda (NEDA 2004, p. 99). 3. Operationalization of the Medium Term Public Investment Program (MTPIP) This will serve as an instrument to monitor public investment commitments over the medium term. 4. Strengthening the ICC process of the NEDA Board 5. Moratorium on the establishment of GOCCs 6. Full implementation of the devolution provision of the Local Government Code 7. Transfer to the General Fund of all dormant accounts. Legislative expenditure measures over the medium term include the Fiscal Responsibility Bill, rationalization/reorganization program, rationalization of retirement and pension benefits, and improvement of government corporate performance. On the revenue side, the national government has likewise lined up both legislative and administrative measures. Under the MTPDP, the following legislative measures are being identified: 1. Indexation of the excise tax on sin products This was signed into law on December 23, 2004 as Republic Act 9334. 2. Lateral attrition system which establishes a system of rewards and incentives covering revenue and customs officials/employees from the district level up to the Commissioner This was signed into law on January 25, 2005 as Republic Act 9335. 3. Rationalization of fiscal incentives which aims to streamline the incentives system to make it an efficient and effective tool for

17

Personal Services Profile of the National Government

investment promotion (NEDA 2004, p. 97). 4. Review of the VAT system which will increase the VAT rate by two percentage points. Both houses of Congress have passed this measure although both differed in revenue impact. 5. Tax on telecommunication which will reimpose the franchise tax on telecommunication companies. 6. Excise tax on petroleum products 7. General Amnesty which requires individuals and corporations to file a statement of assets and liabilities. 8. Adoption of gross income taxation (GIT) which is envisaged to replace the current net income taxation with GIT of corporations and self-employed individual at a rate of 10.0-15.0 percent. In the recent version of the list of measures spearheaded by the Department of Finance (DOF), this has been dropped and replaced by the proposal to adopt a simplified net income tax system. Administrative revenue measures, on the other hand, include the following: 1. Periodic adjustment in fees and charges to ensure cost recovery A joint circular by DOF and DBM was issued to remind government entities in the periodic adjustment of their fees and charges. 2. Tariff rate adjustment This was made effective by an Executive Order increasing duty on petroleum products from 3.0 percent to 5.0 percent. 3. Innovative sources of wealth creation such as privatization of the National Power Corporation, mobilization of investor for Mt. Diwalwal gold mine, exploration and development of more oil and gas wells and relaunching of massive reclamation projects.

18

Personal Services Profile of the National Government

4. Improved enforcement mechanisms to increase efficiency. Recently the Bureau of Internal Revenue (BIR) has launched its program on Run After Tax Evaders (RATE). BIR will file at least a case against one tax evader a week. Corollary to this, interest expenditures are targeted to decline over the medium term (Fig. 13). Personal services is also expected to decline as a percent of GDP. In contrast, capital outlays as a share of GDP will double to at least 4 percent of GDP.

Fig.13. Medium Term Expenditure Targets

7 6 5
(percent of GDP)

4 3 2 1 0

2004

2005

2006

2007

2008

2009

2010

Interest Payments

Personal Services

Capital Outlays

Source: MTPDP 2004-2010

Note: 2004 numbers were changed to reflect actual levels

Feasibility of Granting a Salary Increase In assessing the capability of the national government to grant a salary increase, five scenarios including the baseline scenario were formulated. The basic assumptions of each scenario are shown below: Scenario 5.0 percent increase Basic Assumptions Done every other year starting 2006; 2005 as base year

Scenario 1

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Personal Services Profile of the National Government

Scenario 2 Scenario 3

10.0 percent increase P3,000 across-theboard Inflation adjusted

Scenario 4

Done every other year starting 2006; 2005 as base year Twice for the medium term; only in 2006 and 2010; 2005 as base year Starting 2001, the last salary adjustment; annual increase using mid-point inflation

The granting of salary increase will entail additional requirements ranging from P29.9 billion to P78.2 billion for the medium term based on the four scenarios. The 3,000 across-the-board currently being demanded by the employees unions has the highest requirement followed by the 10.0 percent salary increase (Table 4).

Table 4. Salary Increases, by Scenario (in billion pesos) Scenario 2006 2007 2008 1 9.6 9.9 2 19.0 20.7 3 39.2 4 9.8 7.9 8.2

2009 8.5

2010 10.4 22.8 39.0 8.8

Total 29.9 62.5 78.2 43.2

From the 2005 approved budget for PS of P289.2 billion, a 5.0 percent salary increase will cost the government an additional P9.6 billion in 2006 or roughly a total of P298.3 billion for PS in the 2006 budget. Based on the assumptions, the increase will be done every two years, thus requiring an additional amount of P9.9 billion in 2008 and P10.4 billion in 2010. The total increase in salaries from 2006 to 2010 will amount to P29.9 billion. A 10.0 percent salary increase, on the other hand, will entail an additional P19.0 billion in 2006, P20.7 in 2008, and P22.8 billion in 2010 or a total of P62.5 billion additional PS requirements from 2006 to 2010. The demand of various government employees unions for the grant of P3,000 across-the-board salary increase will definitely put pressure on the

20

Personal Services Profile of the National Government

part of the government and require government to produce additional revenues of P39.2 billion in 2006. To keep up with the current demands and increasing prices, a salary increase based on inflation was also simulated. An average of P8.7 billion a year starting 2002 or a total of P78.3 billion is needed to implement the salary increase given an average inflation rate of 4.0 percent. For 2006 alone, the government will spend around P9.8 billion if salary increase was done in 2002 based on inflation or a total of P43.2 billion from 2006 to 2010. At the rate of inflation with the 2005 base year, the amount of P8.7 billion is needed to implement the salary increase in 2006 or a total of P37.7 billion up to 2010. The impact of these scenarios on the budget deficit is shown in Fig. 14. In all scenarios, the baseline deficit is increased. However, if government decides to maintain the deficit targets, a corresponding revenue increase equivalent to the salary increase should be generated.

Fig. 14. Budget Deficits under Salary Increase Scenarios 0 -25 -50
(in billion pesos)

-75 -100 -125 -150 -175 -200 -225 2005 2006

Baseline Baseline Baseline Baseline Baseline deficit deficit deficit deficit deficit

2007
+ + + +

2008

2009

2010

5% salary increase 10% salary increase P3,000 ATB salary increase inflation adjusted salary increase

21

Personal Services Profile of the National Government It should be noted that the simulation excludes equally competing

claims such as those in the MTPIP which could not be accommodated within the existing revenue measures assumed. Fig. 15 shows the budget deficits as percent of GDP under the four salary increase scenarios.

Fig. 15. Budget Deficits under Salary Increase Scenarios 0

-1
(percent of GDP)

-2

-3

-4

-5 2005 2006
Baseline Baseline Baseline Baseline Baseline deficit deficit deficit deficit deficit

2007
+ + + +

2008

2009

2010

5% salary increase 10% salary increase P3,000 ATB salary increase inflation adjusted salary increase

Conclusion Personal service remains to be one of the highest items in the budget in terms of nominal share. Given the deficit reduction strategy of the national government, any salary increase will either add to the deficit or entail a corresponding reduction in capital outlays. Of the four salary increase scenarios presented, the demand for a P3,000 across-the-board salary increase by government employees unions will have the largest impact.

22

Personal Services Profile of the National Government

The decision to implement a salary increase is a policy decision keeping in mind the priorities of the national government. The MTPDP clearly states that the savings from the rationalization of personal services will be used to fund salary adjustments and the 10-point agenda. Other considerations include on the one hand, the budget deficit target of the national government together with the targeted expenditures in the MTPDP and the MTPIP and on the other, the perception that low salary rates of government employees is one of the major causes of corruption. Given only existing revenue measures, any salary increase will clearly increase the deficit. Thus, as has been maintained by the DBM, it is imperative to have a corresponding revenue measure for any salary increase. A more comprehensive approach to increasing salary rates in the public sector could be taken within the context of a rationalization of compensation, which is being spearheaded by the Civil Service Commission and the Department of Budget and Management. Under this program, a research study on PS by level of government, by occupational and sectoral or functional groups could be undertaken.

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Personal Services Profile of the National Government

References COURAGE, 2000. State Workers Flatly Reject Malacaang Offer of 5% Increase Next Year, Retrieved on 13 April 2005 from http://www.skyinet.net/~courage/stmts/5percent.htm DEPARTMENT OF BUDGET AND MANAGEMENT, 2002. Fiscal Statistics

Handbook 1981-2000.
HELLER, P. S. and TAIT, A. A., 1983. Government Employment and Pay: Some International Comparisons. Washington: International Monetary Fund. HEWITT, D. and VAN RIJCKEGHEM, C., 1995. Wage Expenditures of Central Government. Washington: International Monetary Fund. INTERNATIONAL MONETARY FUND. (various years). Government Finance

Statistics. Washington: International Monetary Fund.

NATIONAL ECONOMIC DEVELOPMENT AUTHORITY, 2004. Medium Term Philippine Development Plan 2004-2010. Manila. PALACIO, R., 2004. Retrieved April 13, http://www.pia.gov.ph/news.asp?fi=p040330.htm&no=1 2005 from

RADWAN, I., 2000 Measuring Government Employment and Wages, Retrieved April 13, 2005 from http://www1.worldbank.org/publicsector/civilservice/wageconcerns. htm CENTER

1997 Nationwide Survey of Salaries and Other Compensation Practices in Private Industry. Manila
FOR PUBLIC RESOURCE MANAGEMENT, INC., 1998.

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