Republic of Montenegro: Public Expenditure and ... - Vlada Crne Gore

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20 Chapter 2: Composition of Public Expenditure and Key Sources of Fiscal Pressure potentially new pressures to expand functions and increase capacity in selected areas, the government of Montenegro will need to develop strategies to restructure areas of the public administration that are currently over-staffed. The scope for large savings in the level of public employment may be limited, but prioritization of staffing levels across the various functions of government is essential if the government is going to assure that it has capacity in the areas that are most needed. Progress in Lowering the Cost of Public Employment 2.24 Encouragingly, total public expenditures in Montenegro for gross wages and salaries have declined as a share of GDP from approximately 14.4 percent in 2003 to 13.4 percent in 2005 (Figure 2.3). 26 Most of the reductions have been attributable to the government’s success in reducing overall public sector employment and in keeping the “base rate” on which most salaries are determined unchanged through 2005. 27 An increase in the base rate and adjustment of some salary coefficients was planned for the 2006. Even with these changes, however, the nominal cost is expected to rise in aggregate by only Euro 10 million (from 221 to 231 million). With continued growth in GDP forecast for 2006, the wage bill to GDP ratio should drop to about 13.1 percent. 2.25 Reductions in public employment have been the principal driver of cost savings. Employment in the public administration (excluding the Health Fund) fell by almost 14 Table 2.5. Changes in Public Employment in Montenegro, 2002-05 2002 2003 2004 2005 Education 12,272 11,914 11,746 11,872 Police & Prisons 7,846 7,191 7,063 7,116 Defense 7,080 6,860 6,164 3,830 Other Functions 7,111 6,592 6,713 6,739 Subtotal 34,309 32,557 31,686 29,557 Health 8,341 8,524 8,656 TOTAL 40,898 40,210 38,213 Source: Montenegrin Ministry of Finance. 26 In this instance the wage bill is defined as including all central government institutions and major extra-budgetary funds (the Health Fund, the Pension Fund and the Employment Fund). It includes an estimate of expenditures for salaries of military personnel, but it excludes the amounts paid for local government employees. The later is estimated to contribute an additional 1.0% of GDP in 2005. 27 Note that the recent freeze in base rates had been proceeded by a period during which the average wage in the labor market doubled. Given the large contribution that the public sector makes to total employment in Montenegro, it is believed that public employees were among the beneficiaries of the high wage increases. See “Republic of Montenegro: Economic Memorandum,” The World Bank, October 27, 2005.
Chapter 2: Composition of Public Expenditure and Key Sources of Fiscal Pressure 21 percent (from 34,309 to 29,557 Figure 2.3. Government Wage Bill as a Share of GDP people) between 2002 and 2005 (including Extra-budgetary Funds) (Table 2.5). Although in 15.0% principle, all sectors were subject to restructuring and downsizing, in practice almost 14.5% all the decline came about through reductions in the 14.0% Ministry of Defense and the Ministry of Interior. Military 13.5% staffing was reduced by about 3,250 or roughly half, and 13.0% employment at the Ministry of Interior dropped by about 10 12.5% percent or 750 people. Education has been the single biggest employer of public servants with more than 12,700 12.0% Source: Montenegrin Ministry of Finance. employed in the sector in 2002. Only about 400 fewer people were employed by 2005. 2.26 Savings in a few sectors have been partially offset by increases in others. For example, employment in the health sector rose by 300 people or about 4 percent between 2003 and 2005. Most functions of government outside of the social sectors, police, and defense were grouped in government statistics as “Other Ministries and Agencies.” This component of the public administration was reduced initially by almost 600 people (about 10 percent), before being allowed to build up again between 2003 and 2005. Perhaps reflecting the creation of new institutions to support administrative accountability, over 200 new people were added to the payroll among the “Other Ministries and Agencies,” representing an increase of about 4 percent. Deeper Reductions Still Needed 2002 2003 2004 2005 2006 2.27 Deeper reduction of about 4 percent of GDP is needed to bring wage bill (inclusive of health sector) in line with the average for EU25 and to create room for EU-related functions and infrastructure spending. There are differences in data reported by different sources, but regardless of the source, at 14.4 percent of GDP for general government, Montenegro’s wage bill appears excessive. Figure 2.4 relies on data reported by Eurostat for EU members. It shows the Montenegro wage bill to be almost 4 percent of GDP higher than the EU25 average (10.4 percent) or the average of the 10 new member states (10.5 percent). Among the EU8 all have wage costs that are lower than Montenegro, including the smaller states such as Estonia.
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Page 3 and 4: CONTENTS ACKNOWLEDGMENTS ..........
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96 Annex 1 Indicator 2001 2002 2003
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Republic of Montenegro: Public Expenditure and ... - Vlada Crne Gore

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