The ballooning public sector wage bill risks Government debt targets, officials warn

Finance Minister Grant Robertson. Photo / Getty Images

Rising public sector wages are in danger of blowing the Government's budget allowances and its path back to stabilised debt, the Treasury warned Grant Robertson earlier this year.

In February advice, officials told the Minister of Finance that, given the Government's priorities, it "likely faced difficult trade-offs to keep within forecast Budget allowances".

They flagged rising wage pressure as a key reason.

"Under current policy, we expect personnel costs to grow faster than planned Budget allowances," the advice said.

"Pay restraint" is one lever to contain rising costs, however it will also need to be combined with other cost control measures, officials advised.

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The advice was provided to the Government prior to its April directive to freeze pay band rises for public sector workers making more than $60,000 per year (the directive was subsequently softened).

Officials were particularly concerned that escalating costs will be driven by Labour Party manifesto commitments, including: Fair Pay Agreements; increasing minimum wages; extending "living wage" guarantees to contracted workforces; making pay equity easier; and pay parity in the health and education sectors.

Further exacerbating cost, the ranks of the public service have swollen considerably since Labour came to power.

Chris Hipkins, Minister for the Public Service, said: "The increase in recent years is due to more investment to implement Government priorities, the Covid-19 pandemic, strong population growth (up 460,000 between the 2013 and 2018 Census), and responding to unexpected events, including two Royal Commissions of Inquiry and the MBOVIS biosecurity incursion."

The count of public servants for last year, 2020/2021, will not be tallied by the Public Service Commission until the end of the year, a spokesman confirmed. But from 2017/2018 to 2019/2020 (a three-year period) numbers rose over 17 per cent. New Zealand's population between 2013 and 2018 (a five-year period) grew a little under 11 per cent.

Hipkins also noted that "more people have been hired recently to help New Zealand fight Covid-19, and to deliver better public services across a number of areas ... We don't expect the rate of growth to continue."

On Thursday, the Treasury confirmed its most current figure for government spending on personnel expenses is $27.8 billion, some 20 per cent of public spending.

The advice noted that if the Government is unable to stick to its own self-imposed spending increases over the upcoming four years it will need to either increase revenue (suggesting tax hikes) or delay the stabilisation of net debt, forecast for 2023.

The Government has budgeted for an operating allowance (new operating funding) of $3.8b in the current fiscal year, but in order for debt to plateau in 2023 and for deficit spending to tip to surplus in 2027 as planned, that allowance is set at just $2.7b per annum in the three successive Budgets from 2022 through 2024.

New operating funding of just $2.7b per year would be the lowest achieved since Labour came to power in 2017, and officials are clearly concerned the Government is in danger of overspending the cap.

In May, the Government caused a furore among unions in announcing what initially appeared to be a pay freeze for most public sector workers.

Given effect through the Public Service Commission, it directed government agencies to make no increases to employees' pay bands above $60,000 (as a default position). However, ministers very quickly backpeddled.

For example, a subsequent letter from Public Service Minister Chris Hipkins to Richard Wagstaff, head of the New Zealand Council of Trade Unions (NZCTU), provided the assurance that, despite the directive, collective bargaining would be conducted "without predetermined outcomes" and "there is scope to discuss cost of living increases in negotiations for all union members ..."

Government spending on personnel expenses is $27.8 billion, some 20 per cent of public spending. Photo / 123RF

In response to the Herald's questions, Hipkins said: "We were very clear in our workplace expectations about the need for moderation in upcoming public sector bargaining rounds, particularly at higher pay levels. This was reinforced by guidance and advice the Public Service Commissioner sent to public sector chief executives."

Wagstaff said it appeared to him "that the Government is prepared to negotiate pay increases not limited to those on low wages [under $60,000 per year]" and he pointed to the current offer to nurses as evidence.

The details of the Government's offer are not public and nurses are now voting on the proposal, but Wagstaff said he is satisfied it has not been subject to "a restraint" on bargaining.

If wages are not contained, however, the Treasury has noted that other areas of big-ticket spending will need to be targetted; it cited health, education and superannuation.

It is possible that future Crown revenues outstrip forecasts, allowing increased spending without altering the debt target or necessitating new tax measures. Since the outbreak of Covid-19, Treasury has tended to underestimate the speed of New Zealand economic recovery.

On the other hand, the Covid-19 response has begun spending outside the Government's budget process that is likely to add further strain to operating allowances in coming years.

The out-of-Budget, $50b Covid Response and Recovery Fund (CRRF), is currently being used by the Government to fund programmes that are likely to continue indefinitely.

For example, the free school lunch programme (annual cost $250m) has been paid for with CRRF money through 2023.

Thereafter the Government must decide to either pay for the policy through new budget expenditure, or discontinue it.