Public sector wage boost warning - Salary hikes could spur spending but slow growth through infrastructure cuts, says economist

A massive increase in public-sector salaries could become a double-edged sword for the economy, economist Keenan Falconer has warned, noting that cuts in infrastructure spending could undermine long-term recovery.

Falconer said the wage increase could have an immediate multiplier effect on spending in the economy in the short term, suggesting that this could aid in boosting recovery through greater consumer expenditure. He said this could filter through the wider economy.

However, he told The Gleaner that this must be weighed against the simultaneous reduction in capital spending on infrastructure, “which can have a dampening effect on growth during the recovery period and offset any gains from consumer spending”.

His comments come in the wake of Thursday’s signing of a wage agreement between the Government and the Jamaica Confederation of Trade Unions (JCTU).

“The Government will have to continue to monitor its wage bill against incoming tax revenues, recovery in GDP, and the country’s inflation outlook to ensure a balanced approach to compensation policy,” the economist noted.

He also suggested that the Government develop a framework to ensure wage negotiations are concluded before the start of a new agreement, thereby improving fiscal planning and minimising risks associated with delays.

Last week, the Jamaica Teachers’ Association (JTA) rejected the Government’s wage offer amid unresolved issues surrounding teachers’ uniform allowance and a graduate policy for educators pursuing further studies.

Months of intense negotiations between the Government and the JCTU ended on Thursday, with the inking of a three-year wage deal that includes an $80,000 grant and back-to-back five per cent pay increases for thousands of public-sector workers.

The JTA was presented with the same basic wage offer from the Government, an element of the package it is not disputing. Instead, the association rejected the overall proposal, arguing that more should be done to improve teachers’ benefits.

The agreement signed with the JCTU covers the contract period April 1, 2025 to March 31, 2028.

On Thursday, Finance Minister Fayval Williams said the Government would not default on the agreement despite rebuilding costs arising from Hurricane Melissa and revenue shortfalls that caused it to miss its first-quarter fiscal targets for 2026-27, leaving a $28.7-billion hole in expected revenues and driving the fiscal deficit to $24 billion between April and June.

The Ministry of Finance’s latest Fiscal Operations Report shows that tax collections fell short by nearly $19 billion while the primary surplus plummeted to $17.9 billion, almost half of its $31.9-billion target.

Reeling from the post-Hurricane Melissa recovery squeeze, the Government was forced to aggressively slash capital spending on roads and infrastructure by more than 22 per cent to keep public finances from spiralling off course.

Williams insisted that the five per cent salary increase in 2026-27 and a further five per cent in 2027-28 would be honoured.

THE RIGHT DIRECTION

“The trend is going in the right direction in terms of the underlying economy. The Planning Institute of Jamaica recently revealed that they’re expecting to see growth again, about a year and a half earlier than they thought it would be. So the recovery is happening, and we expect to see even a greater impact when NaRRA (National Reconstruction and Resilience Authority) comes into play. So we can look forward to that,” she said.

Ahead of the signing, Williams noted that the agreement was reached in extraordinary circumstances, citing Hurricane Beryl two years ago and Hurricane Melissa last October, which left physical damage amounting to US$8.8 billion or 41 per cent of GDP.

Loss of output, the minister said, pushed the figure to 57 per cent of GDP.

“In a single night, we lost equivalent of more than half of everything this country produces in a year. The consequences of that go straight to public finances. Tax revenues came below projections last year. We are running a deficit, and we will be running one across the medium term,” the finance minister said, pointing to parliamentary approval for the suspension of the fiscal rules.

She said compensation of employees now stands at approximately 13.5 per cent of GDP, and at the end of fiscal year 2026-27, wages are expected to account for 54.4 per cent of tax collection, up from 44.9 per cent.

“When a country takes a hit of this magnitude, the conventional response is a wage freeze. That is what the textbook says. It is what has happened to this country before, and it is what has happened in many countries in our position,” she said, adding that “serious well-intentioned” voices indicated that this was the only responsible course.

“This Government did not take that advice. There is no freeze in this agreement; there are no layoffs. There is no deferral of what was already owed,” she said.

The finance minister acknowledged that the agreement comes at a cost, meaning some government priorities will advance more slowly and the return to the country’s debt-to-GDP target will take longer.

“We accepted that because a public service that cannot pay its bills at home cannot be asked to hold the country together in a crisis,” she said.

kimone.francis@gleanerjm.com