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

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Chapter 2: Composition of Public Expenditure and
Key Sources of Fiscal Pressure
2.60 Although the Government has made substantial efforts to reduce the size of public
employment in the past four years, the public sector wage bill continues to represent a relatively
heavy burden on the economy. Between 2002 and 2005, employment in the public
administration fell by almost 14 percent (from 34,309 to 29,557 people). Yet, a comparison with
regional states shows that Montenegro’s wage bill as a proportion of total government
expenditure or GDP still remains far above average. On the other hand, capital expenditure is
much below the level for other countries in the region.
2.61 The prospect of European integration presents dual challenges to Montenegro and both
require politically-challenging prioritization of resources. On the one hand, there is a need to
build capacity in areas that are important for a fully functioning state within the EU. On the
other hand, there is a need to assure that the cost of public employment does not squeeze the
fiscal space needed to maintain existing infrastructure and to fund new programs. In order to
achieve a fiscally sustainable wage bill, the Government should:
• Develop a realistic strategy to reduce staffing in some areas, while expanding
capacity in others. Eighty-seven percent of the wage bill is concentrated on just four
functions—public order, defense, education, and health. All of the other functions and
institutions of government operate on the remaining 13 percent. Any future reductions in
employment should therefore be targeted toward the four dominant sectors. On the other
hand, there may be a need to increase staffing and administrative capacity in ministries
that are central to the EU integration process (discussed in Chapter 3).
• Control the pace of, and target, annual wage increases. The strong leverage of trade
unions in salary and wage negotiations has meant a rapid increase in wages in recent
years, in particular prior to 2004. Future increases in real salary rates should be highly
targeted rather than implemented across-the-board. Without such fiscal discipline, there
is a risk that the wage bill will crowd out essential spending on public goods and remains
a drag on future economic growth.
2.62 The case of education, the largest contributor to the government wage bill, illustrates the
challenges as well as what the government can do. Out of the total recurrent expenditure on
general education in 2004, 82.3 percent was spent on the wage bill, leaving only 17.7 percent of
total recurrent expenditure for non-staff items, which includes spending not only on classroom
materials and teacher training but also utilities. A closer look at the fiscal structure in the sector
shows, again, that the Government faces a clear choice between uncontrolled rises in salaries and
staff costs on the one hand, and spending on non-salary expenditures to pay for the reform
agenda and to improve quality more generally on the other. This choice is particularly stark in
the years 2006-2008. Some key steps that the government can take include:
• Ensure strategic planning takes place within a clear budget framework. The costs of
the education strategy under preparation need to be properly assessed, within a rigorous
priority-setting process. It is unfortunate that the Government approved the Strategy
before this was done and therefore before it was possible to make an informed judgment
that the costs can be met. In addition, funds (grants, credits and in-kind contributions)