Government's payroll costs have to be cut

WEDNESDAY, JAN. 18: Overall, in 2010/11, Government admits to using $60 out of every $100 of revenue to pay for its personnel costs; and $9 out of every $100 of revenue to service its debt. That left only $31 out of every $100 to meet all other government costs [AOGC]. This is displayed in the figures presented by the Minister for Finance in the Ministerial Statement and Pre-Budget Report of 12 December, 2011.

In her statement, the minister has indicated that personnel costs are “rigid expenditures” [the minister’s description]. The minister also suggests that personnel costs will not be materially reduced in 2011/12. Showing 2010/11 for comparison, the impact on 2011/12 spending looks like Table A, below left. It shows that the money available for AOGC in 2011/12 is declining.

The minister also says that $1,260m was spent in 2010/11 and that $1,050m is projected to be spent in 2011/12. This indicates that there was heavy borrowing in 2010/11 and that there will be more borrowing to get through 2011/12. The spending and borrowing look like this: Overall spending $1,260m (2010/11), $1,050m (2011/12).

Overall revenue $991m (2010/11), $930m (2011/12).Amount that must be borrowed $269m (2010/11) $120m (2011/12).

In her December statement, the minister has admitted borrowing $242m to get through 2010/11. In the Pre-Budget Report, the minister indicates that borrowing is expected to continue for at least another two financial years.

The Minister will continue borrowing in an effort to support the “rigid expenditure” of personnel costs. However, this plan to continue borrowing will have the negative consequence of increasing the other ‘rigid expenditure’ of debt service cost. By 2013/14, the ‘rigid expenditure’ of debt service could easily reach $115m a year — or $315,000 a day.

The key issue in today’s financial situation is that since 2003, the combination of personnel costs and debt service costs have risen dramatically. The combining of these two costs creates today and tomorrow’s financial problem.

Illustrating the degree of change in these two costs, look the figures for 2002/03 and 2010/11 in Table B, below left.

From this comparison, it is obvious that the huge increase in the proportion of revenue that is allocated to personnel (30 per cent increase) and the even larger increase in the money that must be allocated to debt service (over 500 per cent increase) are the two critical issues. It is also obvious that there was actually more money available for AOGC eight years ago in 2002/03 than there was eight years later in 2010/11.

For 35 years, from 1968 through to 2003, through six Ministers of Finance (Sharpe, James, Gibbons, Saul, Gibbons, E. Cox) Government’s ‘rigid expenditures’ of personnel costs and debt service costs had always remained below 50 per cent of revenue.

In 2004, the balance between ‘rigid expenditures’ and revenue began climbing:

2002/03 — 48% on personnel and debt service (and 52% on all other government costs)

2003/04 — 51% & 49%

2004/05 — 54% & 46%

2005/06 — 64% & 36%

2006/07— 56% & 44%

2007/08 — 60% & 40% 2008/09 — 64% & 36% 2009/10 — 66% & 34% 2010/11 — 69% & 31% 2011/12 — 75% on personnel and debt service on revenue of $930m (and 25% on AOGC).

Money that is now being borrowed is being borrowed in order to fund these vastly increased ‘rigid expenditures’. The need for borrowing is accelerated by falling or non-rising revenues.

Spending $69 and $75 out of every $100 revenue dollars on ‘rigid expenditures’ is completely unsustainable. These ‘rigid expenditures’ must ultimately fall to where they are, at most, about 50 per cent of revenue. This means that in 2011/12, the amount allocated for personnel and debt service should really be around $465m. Or revenue should be over $1.2bn (that’s revenue, not debt!)

Since debt service consists of funds paid to outside lenders, the $100m must always be paid. The only other possible reduction is in personnel costs. This means that in 2011/12 personnel costs should have been cut back to $365m. It also means that last year in 2010/11, personnel costs should have been around $411m (50 per cent of $991m is $496m, then subtract $85m for debt service, that leaves $411m for personnel).

These cutbacks would have left $495m (2010/11) and $465m (2011/12) for AOGC. Instead, for AOGC there was $309m for 2010/11; and it looks like $233m for 2011/12.

The 20 per cent reduction in personnel costs that has been recommended is a first ‘lite’ bite at a critically serious issue. This issue will not go away. Government’s personnel costs must ultimately and quickly be reduced.

Table A

                                 2010/11                               2011/12

• Revenue                   $991m                                 $930m

• Personnel Costs      ($597m) 60% of revenue        ($597m) 64% of revenue

• Debt Service cost     ($85m) 9% of revenue          ($100m) 11% of revenue

• Available for AOGC   $309m & 31% of revenue       $233m and 25% of revenue

Table B

                                    2002/03                             2010/11

• Revenue                  $676m                                   $991m

• Personnel Costs       ($312m) 46% of revenue         ($597m) 60% of revenue

• Available for AOGC   $353m & 52% of revenue       $309m and 31% of revenue