New pay scale justified amid inflation, but funding a challenge: Fahmida Khatun
If the increase is financed through bank borrowing, money creation or cuts in development spending rather than higher tax revenue, it could put additional pressure on the economy.
The government pay structure has remained unchanged for a long time. During this period, inflation has risen significantly. As a result, the real income and purchasing power of employees, particularly those in lower and middle grades, have declined. Therefore, there is a reasonable case for increasing their salaries.
However, the key consideration is how the increase is implemented.
A salary increase does not necessarily lead to higher inflation. Its impact will depend on how it is financed, the scale of the increase, the availability of goods and services in the market, and coordination between monetary and fiscal policies.
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If the increase is financed through bank borrowing, money creation or cuts in development spending rather than higher tax revenue, it could put additional pressure on the economy.
Higher incomes for government employees will increase consumption and aggregate demand. The government should therefore take steps to increase the supply of food, housing, transport, and goods and services to contain any resulting inflationary pressure.
Another important consideration is fairness. If government employees receive significant salary increases while the incomes of employees in autonomous institutions, state-owned enterprises, project-based and outsourced positions, as well as teachers, journalists and private-sector workers, remain unchanged, disparities and dissatisfaction among different professional groups could widen.
Although mechanisms exist to determine wages in different sectors, including the Wage Board for journalists, they are often irregular, outdated and weakly implemented. Salaries in the public and private sectors cannot be determined in the same way.
Nevertheless, there should be reasonable alignment among minimum wages, Wage Board decisions and the cost of living.
Financing the new pay structure will be a major challenge. The government already faces a budget deficit, which could widen significantly as a result of the additional expenditure. The budget, however, already includes an allocation for implementing the new pay structure.
Another key issue is whether higher salaries will be matched by improvements in the efficiency and capacity of government employees. If productivity does not improve, the country and the economy will receive little return from the additional expenditure.
On the other hand, if greater efficiency among government officials speeds up project implementation and reduces waste and corruption, the government could save money. In that case, the impact of the pay increase on inflation may be limited.
The government is introducing the new pay structure to improve the welfare of its employees, but it also has responsibilities towards workers in other sectors, particularly the private sector. It should take effective measures to prevent the new pay structure from widening the wage gap between public- and private-sector employees.
Fahmida Khatun is a Distinguished Fellow, Centre for Policy Dialogue
