As Papua New Guinea’s Treasurer introduces a supplementary budget, Director of the Development Policy Centre, Stephen Howes, analyses the extraordinary growth of PNG’s government salary bill and explains why it’s a concern.

Inside the National Parliament of Papua New Guinea. Credit: BAI

In 2013, PNG’s resource boom ended. Government revenue in 2019 was no greater than it was in 2013, once inflation is taken account of. But, over this same period, the salary bill has grown by 43 per cent, again after inflation.

PNG government salary bill and revenue, 2013 to 2019

Note: Foreign aid is excluded from revenue, as aid can’t usually be used for salaries.

That is a rapid rate of increase in salary payments by any standards (an average of six per cent a year – plus inflation). But what is really striking is that this rapid growth came in a period (from 2013 onwards) where there was no increase in real revenue, and when the country was running record deficits, and running up arrears.

The ratio of salaries to own revenue went up from 31 per cent in 2013 to 45 per cent in 2019.

Nearly all of the salary bill increase came in two years: 2014 and 2018, when the salary bill grew by 26 per cent and 14 per cent respectively (after inflation). As you can see from the graph above, these were also the two good years for revenue. Perhaps this led to a relaxation on hiring controls, and also gave the opportunity to pay arrears, especially towards superannuation.

‘If your revenue is not growing, and you are running up arrears and struggling to borrow, you can’t afford an increase in your salary bill.’

Although the 2014 blowout is bigger, the 2018 one is particularly striking because, at the end of 2017, the government promised the World Bank through its Medium Term Fiscal Strategy (MTFS) that it would not increase the salary bill at all in the next two years. The PNG government knew it was facing fiscal difficulties, and wanted a loan from the World Bank to help finance its deficit. Promising to keep a tight lid on salaries is quite common in such a context. But the government completely blew that promise. As the graph below shows, far from keeping the salary bill flat in nominal terms, the salary bill exceeded its target by more than 25 per cent in both 2018 and 2019.

Salary bill: commitments and actuals

Why this massive discrepancy? Certainly, the O’Neill government specialised in mixed messaging: on the one hand telling the World Bank and other donors that it was serious about reform, on the other denying in public the very need for reform. But, really, who knows? The two massive salary increases in 2014 and 2019 certainly paint a picture of a salary bill that is out of control, and impossible to predict, let alone contain.

‘Together, PNG’s rising salary and interest bill have reached almost 60 per cent of own revenue, putting the budget under enormous stress.’

PNG needs more teachers and doctors, but who is being hired? The 2019 budget outcomes document provides estimates of the size of the civil service between 2015 and 2019, when the salary bill grew by 11 per cent in real terms. It shows eight per cent growth in total numbers over this period, and seven per cent growth in teachers (who make up 56 per cent of the total public service).

Whether or not the additional hiring has been in priority areas, the harsh reality is that if your revenue is not growing, and you are running up arrears and struggling to borrow, you can’t afford an increase in your salary bill.

Rising salaries are one reason PNG has had to borrow more in recent years. Together, PNG’s rising salary and interest bill have reached almost 60 per cent of own revenue, putting the budget under enormous stress. That is a level last seen in the late 1990s and early 2000s, a period of fiscal crisis. All the additional fiscal space provided by the resource boom of the intervening years is gone.

Salaries and interest as a percentage of own revenue

The rising salary and interest bills are the twin fiscal legacies of the O’Neill government. Undoing the damage to service delivery, and re-establishing PNG’s reputation as a responsible fiscal manager would have been a tall order without a once-in-a-century pandemic. The task is now even more difficult.

Stephen Howes is the Director of the Development Policy Centre and a Professor of Economics at the Crawford School, Australian National University.

All data from the PNG Budget Database. The longer time series in the final graph excludes statutory authority salaries. This article appeared first on Devpolicy Blog (devpolicy.org), from the Development Policy Centre at The Australian National University.