How much hike can the 5th Pay Commission really afford?

Commission to look at Clean Wage and Performance based pay system

Tenzing Lamsang/ Thimphu

With the government forming the 5th pay commission on 19 October through an executive order, there are expectations among civil servants of a major pay hike coming up.

This perception has come up in line with the civil service reforms where the expectation is that not only will performers be paid better but the civil service overall will be paid better.

However, the reality is that the 5th Pay Commission has a very limited kitty to hand out, if at all.

Limited budget

As per the annual budget of 2022-2023 the total revenue available is Nu 36.368 billion (bn) while the current expenditure (salaries, maintenance, operations) is Nu 36.340 bn.

With the Constitution mandating that all current expenditure must be met from internal resources the pay commission as per the budget only has Nu 28 million (mn) to play with.

Of the Nu 36.340 bn current expenditure the majority coming at more than Nu 20 bn has to do with the pay, allowances, wages and benefits of civil servants.

Pay and allowances are Nu 17.127 bn, other personnel emoluments which are gratuity, LTC, etc is Nu 1.072 bn, provident fund contribution from the government is Nu 1.736 bn and a chunk of the Nu 2.232 bn general reserves kept for exigencies or ad hoc expenses includes salaries and benefits for new staff who are recruited.

In addition to the above the Nu 1.829 bn kept as grants for public enterprises not only includes the power tariff subsidy, but also the salaries of public servants in state owned corporations under the Ministry of Finance like Food Corporation of Bhutan, BBS, etc.

A source said that if there was enough revenue like in other years with it even being enough to meet capital expenditure then there would have been space for the commission to recommend a hike, but that fiscal space is simply not there, short of breaching the Constitution.

So with the total pay, allowances and benefits being around Nu 20 bn even if the Commission recommends a 10% salary hike then it will Nu 2 bn which the budget does not have.

The only way for the commission to give a hike is to increase the revenue by recommending new taxes which will not happen, or to recommend dramatic cuts in current expenditure which is also not possible as the current expenditure has already been significantly cut.

For example, one much talked about area for cutting is TA/DA but this has already been slimmed down to Nu 688 mn and the amount is necessary to deliver services and implement activities.

Other measures like not serving lunch or snacks etc can also save only so much.

What also limits the commission is that the 2022-2023 Annual Budget has the highest ever fiscal deficit of Nu 22.882 billion (bn) which is 11.25 percent of GDP.

Fiscal deficit, simply put, is the amount of money not available in the budget due to a mismatch between the expenditure and the revenue. The total expenditure projected for 2022-23 is Nu 74.807 bn but the revenue projected is only Nu 51.925 bn.

While the fiscal deficit is due to less revenue and higher capital expenditure (roads, buildings etc) the problem still remains. 

This is higher than the previous record of 2021-2022 budget year, which is Nu 17.498 bn at 9.30 percent of GDP.

Even in the executive order forming the commission it makes it clear that Commission will recommend ‘fiscally sustainable’ payment system and the Term of Reference says, ‘The Commission must ensure Financial implications of the proposed remuneration system on the current fiscal state of the nation are considered.’

Given the above realities, the two main things the Commission will look at doing is first instituting the Clean Wage system and secondly recommend a payment system that rewards performance going forward.

Clean Wage

Under the Clean Wage system, the Commission will first study and review the array of allowances given to different categories of civil servants, rationalize them and then club them all together so that they can be paid as part of the basic pay.

A source said this should not make a difference to the majority of civil servants whose allowances are already taxable.

However, if the Commission decides to monetize the Nu 250,000 vehicle quota entirely instead of giving an option to take a vehicle then this quota will be paid as part of the salary on a monthly basis and be taxable.

Similarly, currently the Nu 1 mn grant given to MPs to buy a vehicle every five years is not taxable, but under clean wage this could get converted into an allowance to be broken up and paid every month making it taxable.

This would increase the tax burden slightly for civil servants and more for MPs.

The whole idea of a Clean Wage system implemented in countries like Singapore and others is to have a transparent system where everything is paid in salaries and there are no hidden benefits and allowances.

Currently, the civil service system is littered with allowances like house rent allowance (HRA), communication allowance, difficulty area allowance, regular contract allowances, discretionary allowance, special responsibilities allowance, overtime allowance, duty free membership for senior officials, high altitude allowance, cash handling allowance, uniform allowance, night duty allowance, patang allowance, dancer allowance, prosecution allowance, Overtime Session Allowance (Parliament staff) and radiation allowance.

However, the highest allowances are enjoyed by ministers and MPs like 30% HRA (or bungalow for ministers), chauffer driven car (ministers) or driver allowance, annual discretionary allowance (Nu 150,000 per year for MPs, 200,000 for ministers and 300,000 for PM), utilities all paid (ministers), phone allowance, fuel allowance, Prado Quota or Nu 1.5 mn monetized amount and Nu 1 mn to buy vehicles (for MPs).

MPs get Nu 56,650 in just allowances apart from their basic pay of around Nu 80,000.

However, a source said that the Commission this time around will not touch the professional allowance component. Professional allowance is given for medical staff, teachers, Royal Audit Authority, Anti-Corruption Commission, Internal Auditors and Department of Civil Aviation.

If the resources can be made available or savings made the Commission despite the challenges may try and squeeze in a slight minimal increase through the clean wage. 

Performance based pay

Apart from the clean wage the other main area of focus for the Commission will be recommending a remuneration system that will drive performance in the civil service, in line with ongoing reforms.

This in short means rewarding agencies and individuals who perform well with higher pay.

A source said that it will be difficult for the Commission to recommend concrete and detailed performance incentives for two reasons.

One is the resource constraint listed above as any recommended hikes will have to be backed by the resources available or a pool of separate funds for performance.

The second challenge is that the Performance Management System (PMS) of the RCSC is still in the works and not yet sophisticated enough to measure the exact level of performance.

The Commission instead is expected to recommend the foundations or the road map of a performance based pay system without getting into the exact details and percentages.

Another option is to make recommendations which would be effective only once the resources and systems are both available and ready.

A source said the Commission cannot say an agency or individual should be given so much for so much performance as the tools are not ready.

The source said, “The cart cannot be put before the horse.”

The PMS system will have to be ready, resources be made available and then only money can be kept aside.

Another challenge for the Commission will be to estimate how much people can be kept in the various categories of performance, and if there will be enough funds for them.

However, at the same time the Commission will also be expected to build on a performance based pay system that a Ministry of Finance (MoF) Committee was working on until recently.

The MoF committee was working on a proposal of paying civil servants two types of wages. One would be a basic pay that would include all allowances like house rent allowance etc. as a Clean Wage, and the other component would be variable pay which would be paid only at the end of the year depending on the performance of the nation’s economy, agency’s performance and individual performance.

The model being studied for this was a mix of the Druk Holdings and Investment (DHI) and Singapore Civil Service pay system.

In the case of civil servants, the performance of civil servants will be linked to the revamped PMS and the Individual Work Plan under it.

The big challenge for the MoF committee was to carve out funds from the budget pool for this performance component and link it to an effective PMS system.

For example, while civil servants normally get paid for 12 months in a year there could be pay for up to 15 months in a year for performing civil servants. As a result, even a junior civil servant can earn more than his or her seniors if they perform well.

The bonuses could be an individual bonus component, an agency level bonus component and a national level bonus component.

However, the exact amount of bonuses to be made available would be dependent on the funds available.

The Pay Commission in that sense will take forward the work of the MoF Committee on Clean Wage and Variable Pay linked to performance.

The Commission will have to submit its report within a month after which it will be dissolved which means it has time till around mid November.

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