Presentation on update of macroeconomic framework for negotiations 2[1]

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Presentation on update of macroeconomic framework for negotiations 2[1]

  1. 1. 1
  2. 2. Order of Presentation International Economic Situation Impact on St Lucia’s Economy Highlights of Government Fiscal Position Growth in Salaries and Wages Issues for Consideration Recommendations 2
  3. 3. Global economic outlook has worsen… The recent deepening of the European banking and sovereign debt crisis has given rise to renewed uncertainty of the pace of the global economic recovery. Growth has slowed in some of the major drivers of the global economy such as China, India and Brazil. The recovery in the US and other advanced economies appears to be stalling. There are renewed fears that the global economy is headed for a recession. 3
  4. 4. 4 2010 2011 2012 2013 World Output 5.3 3.9 3.5 3.9 Advanced Economies 3.2 1.6 1.4 1.9 USA 3.0 1.7 2.0 2.3 Euro Area 1.9 1.5 -0.3 0.7 Germany 3.6 3.1 1.0 1.4 France 1.7 1.7 0.3 0.8 Italy 1.8 0.4 -1.9 -0.3 Spain -0.1 0.7 -1.5 -0.6 Japan 4.4 -0.7 2.4 1.5 UK 2.1 0.7 0.2 1.4 Canada 3.2 2.4 2.1 2.2 Emerging & Developing Countries 7.5 6.2 5.6 5.9 China 10.4 9.2 8.0 8.5 India 10.8 7.1 6.1 6.5 LAC 6.2 4.5 3.4 4.2 Brazil 7.5 2.7 2.5 4.6 Mexico 5.6 3.9 3.9 3.6 Source: IMF WEO (July 2012) World Economic Projections - Percentage Change
  5. 5. … and Saint Lucia’s economy could be negatively impacted Saint Lucia’s economy is very open and closely integrated with advanced economies, US, Canada and Europe. As these economies continue to slowdown, we could see decline in tourist arrivals, FDI inflows, lower demand for our exports, reduced grants. Major productive sectors of our economy are likely to come under intense pressure this year reflecting the global slowdown. 5
  6. 6. Economic growth is likely to be subdued The stimulus package announced in the 2012/13 budget will have a positive impact on growth and employment but downside risks are mounting. Impact on growth and employment depends on the pace of implementation and sustainability of programs. Impact is likely to be realized towards the latter part of 2012 given the need to raise financing and put measures in place. Recent experiences with debt restructuring around the region (Antigua, St Kitts and now Belize) may not bode well for our fund raising drive. While growth of 2.5 percent was projected for 2012, we may fall short of target given mounting downside risks. 6
  7. 7. Fiscal position is likely to deteriorate sharply Recurrent deficit in the 2012/13 budget – borrowing to finance recurrent expenditure. More than half of the $40.8 million recurrent deficit was realized in just the first quarter (Apr – Jun 2012). Based on current trend and given mounting expenditure pressures, the recurrent deficit is likely to exceed the budget target. Revenue performance was below projections for April to June 2012, falling short of target by $23 million. The likely increase in recurrent and capital expenditure coupled with lower revenue collection are expected to result in an increase in the overall fiscal deficit to about 9 percent of GDP. 7
  8. 8. 8 2007/08r 2008/09r 2009/10r 2010/11r 2011/12pre TOTAL REVENUE AND GRANTS 753.10 829.03 826.79 873.91 921.63 Current Revenue 741.23 804.87 759.62 787.18 828.76 Tax Revenue 687.74 737.74 700.76 736.34 757.39 Non Tax Revenue 53.49 67.13 58.86 50.85 71.37 TOTAL EXPENDITURE 811.34 856.82 925.08 1,041.04 1,183.25 Capital Expenditure 230.70 208.17 241.31 298.57 402.60 Current Expenditure 580.64 648.65 683.77 742.47 780.65 Salaries & Wages 266.97 301.07 316.15 342.30 350.31 Current Balance 160.59 156.22 75.85 44.71 48.11 Primary Balance 26.27 60.68 -11.54 -65.38 -150.45 Overall Balance -58.24 -27.79 -98.29 -167.13 -261.62 Salaries and Wages Account for Single Largest Share of Increaes in Current Expenditure Increases in Current Expenditure ($ Mil.) 25.77 68.01 35.12 58.70 38.18 Increases in Salaries and Wages ($ Mil.) 11.32 34.10 15.08 26.15 8.01 S & W as Percentage Share of Increases 43.9% 50.1% 42.9% 44.5% 21.0% 40.5% CENTRAL GOVERNMENT SUMMARY OF FISCAL OPERATIONS [Fiscal Year] ECONOMIC CLASSIFICATION (EC$ Millions)
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  10. 10. 10 FY 2012/13 Budgeted Prudential Ratio Current Account Surplus (% of GDP) -1.7 3 to 4 Overall Deficit (% of GDP) 9.3 3.0 Public Debt (% GDP ) 75.9 60 (by 2020) Debt Servicing to Current Revenue (%) 24.5 15.0
  11. 11. Salaries and wages are growing steadily… The wage bill has increased by 65.5 percent over the last 10 years growing at an average rate of 6.5 percent a year, one of the highest rates of growth in the ECCU. The wage bill is the largest component of current expenditure averaging 46 percent. Salaries and wages account for average of 41 percent of current revenue. Averaging 9.8 percent of GDP over the last 5 years. Increases in wage bill over the years have been the single largest contributor to increases in current expenditure. Increases in salaries and wages result in permanent increase in expenditure. 11
  12. 12. 12 Average Numbers Employed by the Central Government Category 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* # Change 2012/2011 Civil Servants** 3,086 3,136 3,099 3,065 3,071 3,138 3,268 3,335 3,383 3,419 35 Teachers 2,109 2,075 2,019 2,038 2,064 2,172 2,251 2,311 2,319 2,331 12 Police 829 853 895 941 1,027 980 974 1,016 1,057 1,119 62 Fire Service 217 217 228 230 287 285 274 270 284 297 12 Prisons 126 126 119 110 128 132 134 156 160 156 -4 Nurses 304 287 257 234 222 213 220 225 236 236 0 Doctors 64 65 66 88 81 79 75 72 73 73 0 Daily Paid 962 963 954 942 964 985 895 902 925 945 20 Other 185 218 304 323 209 214 305 338 371 371 0 Total 7,881 7,939 7,940 7,971 8,052 8,199 8,395 8,625 8,808 8,946 138 % Change 0.7% 0.0% 0.4% 1.0% 1.8% 2.4% 2.7% 2.1% 1.6% Increase in numbers 58 1 31 81 147 196 230 183 138 Total Grades 1-18 7,829 7,880 7,882 7,917 8,006 8,160 8,336 8,555 8,739 8,877 139 % Change 0.7% 0.0% 0.4% 1.1% 1.9% 2.2% 2.6% 2.2% 1.6% * refers to the average for the period January to May 2012 ** includes persons paid wages
  13. 13. 13 Comparative Public Service Salaries in Selected OECS Countries St Lucia St Vincent & Grenadines Grenada Dominica Accountant II 59,533 50,136 51,060 40,611 Customs Officer II 59,533 32,532 NA 31,849 Economist I 52,080 48,711 44,256 40,611 Secondary School Principal 63,259 57,948 50,808 53,387 Nurse I 40,446 NA NA 36,230 Qualified Teacher 36,992 NA 26,148 NA Police Constable I 25,176 20,220 15,484 NA Police Corporal 36,992 27,228 24,504 NA
  14. 14. 14 Salaries and Wages Scenarios (2010/11 to 2012/13) Yr. 1 Yr. 2 Yr.3 Rate of Increase Total Costs Scenario 1 0% 0% 3.0% 3.0% $10.0 Mil. Scenario 2 1.0% 2.0% 3.0% 6.0% $33.4 Mil. Scenario 3 4.0% 4.0% 8.0% 16.0% $93.4 Mil.
  15. 15. 15 Inflation Over-compensation % (%) Growth Inflation 2004/05 4.57 2.44 3.00 (1.57) 0.56 2005/06 0.75 4.42 3.00 2.25 (1.42) 2006/07 7.24 2.32 4.00 (3.24) 1.68 Cumulative 2004/05 to 2006/07 12.56 9.18 10.00 (2.56) 0.82 2007/08 3.11 4.07 3.00 (0.11) (1.07) 2008/09 3.96 4.83 4.00 0.04 (0.83) 2009/10 0.38 (0.26) 7.50 7.12 7.76 Cumulative 2007/08 to 2009/10 7.45 8.64 14.50 7.05 5.86 Cumulative Total last 6 years 20.01 17.82 24.50 4.49 6.68 Cumulative Average last 6 years 3.34 2.97 4.08 0.75 1.11 2010/11 0.70 3.04 2011/12 1.40 3.47 Real GDP Growth Salary Increases (%)
  16. 16. Issues to consider Government’s main economic priority is to grow the economy and create jobs. The main impetus for economic growth and job creation will come from the public sector. Given absence of fiscal space, Govt needs to remain focus on achieving its economic priority. The issue then becomes, should we be awarding salary increases to those in jobs or creating new ones? No space in the budget for both. It is not prudent to borrow to pay for salary increases in the context of a recurrent budget deficit. 16
  17. 17. Issues to consider Our fiscal problems will not be solved with the introduction of VAT if there is no expenditure restraint. Any revenue generated in excess of the VAT estimates should be used in funding Govt job creating strategy and improving social safety nets. Awarding salary increases will result in a permanent rise in current expenditure which will further compound our fiscal problems. This could have major repercussions for our sovereign credit rating and the cost of borrowing. Funding agencies and investors in Govt securities pay attention to the views of the rating agency and the IMF Salary increases should be in line with increases in worker productivity if our economy is to be competitive. 17
  18. 18. Recommendations Given the fiscal challenges and downside risks to the economy, unions should consider foregoing salary and wage increases for this triennium. It should be recalled that civil servants were over compensated for the 2007/08 to 2009/10 period using the criteria of economic growth and inflation. Further justification can also be provided on the basis of the generous stimulus package announced in the budget that should assist civil servants. Consideration should be given to starting and completing negotiations early for the 2013/14 to 2015/16 period. 18
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