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The federal cabinet has recently approved a special allowance to employees equal to 25 percent of the basic pay with effect from the 1st of March 2021. This increase has come after a gap of almost three years. The last increase was in June 2018.

The special allowance is initially only for BPS-1 to BPS-19 employees. The Budget of 2021-22 is expected to extend this allowance also to higher grades from BPS-20 to BPS-22. In addition, there is the likelihood that the special allowance will be merged into the basic pay.

The salary increase has been granted in the aftermath of agitation in Islamabad. The two budgets of 2018-19 and 2019-20 had no provisions for increases in the pay and allowance of employees. From July 2018 to December 2020, the Consumer Price Index has increased cumulatively by 26 percent. Therefore, the demand for increase in emoluments was linked to the big rise in the cost of living.

The previous government had adopted the practice generally of annual increases. The last year of the PML-(N) government of 2017-18 contained a comprehensive package of salary increases including, first, merger of allowances given earlier into the basic pay. Second, 10 percent ad hoc relief was given on the merged salary of all civil and armed forces. Third, there was a 10 percent increase in pensions. Fourth, an increase was granted in some allowances.

The total cost of this package of salary enhancements was Rs 125 billion. Simultaneously, the minimum wage in the country was raised from Rs 14,000 to Rs 15,000 per month. It has since been raised it to Rs 17,000 per month.

There is need to evaluate the size of the total salary bill of all civil and military employees. This is necessary to see the implications of steps likely to be taken in the Federal Budget of 2021-22.

The Budget documents reveal that in 2019-20, the total cost of salaries and pensions of all federal employees was Rs 1,159 billion, according to the Revised Estimates. This is equivalent to almost 25 percent of the total current expenditure. The shares of civil and military employees respectively were 29 percent and 71 percent. The distribution between the salary bill and pension payments was respectively 64 percent and 36 percent.

An analysis has been undertaken of the rise in the overall federal salary and pension bill from 2014-15 to 2019-20. The total cost has risen by almost Rs 421 billion, equivalent to a cumulative increase of 57 percent. The cost of living, as measured by the CPI, had increased during the period by 32 percent. Therefore, there has been a jump, over the period of five years, in real incomes of 25 percent. This represents a major enhancement in emoluments of both employees and pensioners. The latter have benefited more with a rise in pensions of 91 percent.

Numbers are not available on the number of employees or on the number of pensioners. According to the Labor Force Survey, the annual increase in the numbers of employees in the Public Administration and Defense Sector has been 2.5 percent between 2014-15 and 2017-18. However, this also includes employees in the Provincial Governments. It is very unlikely that the employment has risen at the same rate as the increase in real incomes. Therefore, it is appropriate to conclude that the per capita income of government employees has gone up significantly between 2014-15 and 2019-20.

What has been the size and increase in the corresponding salary bill in the private sector? According to the recent SBP publication on Financial Statements Analysis of Companies (Non-Financial) listed at Pakistan’s Stock Exchange, the total of salaries, wages and employee benefits has increased from Rs 245 billion in 2014 to Rs 382 billion in 2019, equivalent to a cumulative rise of 56 percent. As such, this is close to the increase of 57 percent in the case of employees of the Federal Government. There should also be an appropriate increase in the minimum wage by the Provincial Governments in June 2021.

There is need to derive the implications on the Budget of 2021-22 of the increase in remuneration of civilian employees. The annual cost of the granting 25 percent special allowance to all employees from BPS-1 to BPS-22 will be Rs 26 billion. If the allowance is merged into the basic pay then the total cost will exceed Rs 50 billion.

There are also two unresolved issues. The first relates to the remuneration of the military personnel and pensioners who have also received no increases since 2017-18. Horizontal equity requires that the soldiers be granted the same increase of 25 percent. They have done a stellar job of fighting the war on terror and defending our borders. They have also experienced the same impact of a rise in cost of living due to the acceleration in the rate of inflation which may have affected their morale. As such, they should be treated in the same way as civilian employees in the forthcoming Budget. This will require an additional budgetary provision of almost Rs 130 billion.

Pensions have risen faster during the last few five years than salaries. Therefore, a decision will have to be made regarding any increase in pensions. A modest 10 percent increase will cost Rs 50 billion.

Overall, depending upon the decisions taken the federal salary and pension bill could rise significantly, over and above the normal growth, by up to Rs 230 billion in 2021-22. In addition, there may be pressures on provincial governments to preserve the parity in emoluments of their employees with those of federal employees.

There will be pressure, especially after the reactivation of the IMF Programme, to contain the fiscal deficit in a big way. As such, there will be need for additional taxation and economy in non-salary operating costs to finance the additional cost of potentially up to Rs 230 billion in salaries and pensions. We wish the government success in this regard.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021