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The past few weeks have been characterised by a spate of strikes in public services that brought the country to almost a halt. Fortunately, these have been called off.

Now that the presidential election is expected shortly, there is a prospect of a period of trade union quiet to facilitate the election of a regime that they expect will address their grievances. However, increasing wages in the current financial bind is no easy task.

Overview

Workers in about 200 public sector trade unions held a two-day sick-note campaign and threatened to intensify their trade union action unless the government grants their demand for the allowance of Rs 25,000 paid to state sector Executive Grade officials. At present, they receive a Rs 10,000 cost-of-living allowance.

There is no doubt that workers in the public and private sectors deserve pay hikes to meet increasing living costs. The cost of living has skyrocketed this year, though the rate of increase in prices or the rate of inflation has been decreasing. However, this wage increase is not financially feasible.

Justified

It is undeniable that state employees deserve an increase in salaries to cope with rising prices. However, it is not financially feasible to grant a large allowance or pay hike when a reduction in government expenditure is needed to ensure a lower fiscal deficit.

Strikes

The trade union action crippled a wide range of activities. The main reason for this spate of strikes has been the demand for higher wages. The most disruptive of these strikes was that of railway workers. It crippled much of public transport. Fortunately, the intervention of a group led by former Speaker and National Movement for Social Justice (NMSJ) president, Karu Jayasooriya, averted a catastrophic situation of railway strikers losing their jobs and retirement benefits owing to the railway being declared an essential service.

The settlement of this strike has made other trade unions, too, call off their strikes and seek negotiated settlements later.

It appears that opposition political parties too have advised trade unions not to strike during the run-up to the presidential election, as strikes may give cause for not holding the presidential election before October 16.

Cost of living

The cost of living has increased quite sharply. Prices of essential commodities and services have escalated to reduce real wages substantially. Undoubtedly, the demand for higher wages from lower-income earners is justified, as the recent price escalation has made their wages inadequate to meet their living expenses. The increasing prices of essential items have, no doubt, given a justification for their demands.

Problem aggravated

The problem has been compounded by some sections, like doctors and academics, being given allowances that have not been given to others. This has made the clamour for increased wages seem justified.

Inflation

There can be no doubt that living costs have risen, adding to the hardships people are facing. On the other hand, one of the boasts of the government has been that it has brought the rate of inflation down. In fact, as much as prices have risen sharply this year, the rate of inflation has been falling each month.

Inflation explained

These two apparent contradictions can be explained. Both claims are correct and not contradictory. Undoubtedly, prices have risen and will continue to increase, although the rate of inflation is coming down. This is due to the rate at which prices have increased during that month decreasing after the earlier price increases. In other words, prices are continuing to increase, though they are increasing at a lower rate.

The rate of inflation decreasing does not mean that prices are coming down. It means that prices are rising by a lower amount. Therefore, what we are seeing is that prices are rising every month by a decreasing amount. The cost of living is increasing, and the number of goods we can buy is diminishing.

Justified

The cost of living has increased sharply. The prices of essentials have increased so much that the wages of lower-salaried workers are inadequate to make ends meet. Although there is a cost of living allowance (CLA) for public servants, this is hardly adequate to compensate for the monthly price increases. Therefore, the demands for higher wages are reasonable.

No finances

The other side of the coin is that the government is unable to meet these demands as it does not have the means to meet the huge expenditure of a bloated public service. Furthermore, increased salaries would increase the fiscal deficit and derail the process of fiscal consolidation, which is vital for economic stability.

Solution

This problem of inadequate resources to provide a living wage has to be addressed by a comprehensive programme of reforms that increase government revenue and decrease government expenditure. This is a huge task for the next administration.

Summary and conclusion

Undoubtedly, prices have soared to the extent that most workers in public services are unable to make ends meet. Some may not be able to provide adequate food for the family and purchase basic needs. There is, therefore, a justification for higher wages. However, the finances of the government are such that these demands cannot be met. Were they to be given, the fiscal deficit would increase and the process of fiscal consolidation would be derailed. Furthermore, salary increases would in turn lead to increased prices, as too much money would be chasing too few goods.

Finally

Fiscal reforms that increase revenue collection and reduce public expenditures are crucial to breaking this vicious cycle. Economic reforms such as the privatisation of loss-making enterprises are needed to reduce public expenditure. The growth of the economy is vitally important to enable increased public expenditure as well as reduce prices.