10 Jul 2016 No gain without wage reform

Back in 2013, the Cyprus economy was staring over the abyss. Two of the largest banks  were about to fold, the government was unable to borrow money to recapitalise them and it was not at all certain that there was political will among eurozone leaders to help.

Three years later, thanks to the bailout, the bail-in, a lot of hard work and a lot sacrifices by both the public and private sector, the Cyprus economy is on the mend.

The government budget is in surplus, the banks are well capitalised, and the economy is skimming along, at least until the weak pound sterling makes a big dent in UK tourism arrivals.

While these successes are to be commended, there is one very important piece of the jigsaw still missing, and that is the introduction of comprehensive public-sector wage reform.

To date, the government has kept public-sector wages down with temporary measures, including a suspension of inflation-indexation and automatic increases based on years in the job.

All of these measures are due to expire at the end of this year. If we take a look at wage growth in the past decade or more, we can see what might happen if there is no reform.

Between 1995 and the peak in 2011, government spending on compensation of employees (wages and salaries) rose 3.2 times. GDP in the same period rose 2.5 times.

This means that the wage bill was an ever-rising proportion of GDP, growing from 11.6% of GDP in 1995 to 14.7% by 2011. The biggest leap in spending came in 2003 – a presidential election year –  when spending on wages and salaries rocketed by 18.8%. In 2009, when Cyprus fell into its first recession since 1974, the wage bill grew by 9%.

Not surprisingly, with wages growing and the economy shrinking, the national debt ballooned from a low of 45% of GDP in 2008 to almost 80% of GDP just four years later in 2012. Troika borrowing pushed that all the way up to more than 100% by 2013.

This is why it is so important that members of parliament pass mechanisms to prevent this ever happening again. Otherwise, all the sacrifices of the past few years will have been in vain.