by Ali Al-Mawlawi LSE – London School of Economics
The illusive nature of long-term stability in the Middle East necessitates a strong commitment by Iraq’s political leaders to develop a sustainable economic and fiscal regime that can absorb future shocks to the system. In 2014, after a third of the country fell under the control of the Islamic State (IS), the Iraqi government was faced with the challenge of wresting back territory from transnational terrorists in the midst of an emerging fiscal crisis that threatened to upend the military campaign. With the crash in oil prices and the unlikely prospect of a return to the days of $100/barrel, policymakers have been preoccupied with trying to find ways to rein in public spending to adapt to the shortfall in oil revenues. Central to this challenge is the need to better control the growth of the public wage bill in order to reorient spending toward much-needed capital investment and social services in order to address the country’s pressing post-war priorities.
The wage bill represents the single biggest item of spending from the state treasury. Each year, parliament passes a federal budget bill that allocates government spending for all state ministries and independent bodies. Budgets are divided into recurrent spending, which includes salaries for public sector employees; and capital spending, representing the investment portion of the budget. Recurrent spending is largely determined by the number of budgeted employees within each ministry and independent body. This figure naturally increases year-on-year as the number of people entering the job market far outweighs retiring public servants.
A historical analysis of budget allocations to cover compensation for employees since 2003 shows unsustainable growth that poses a burden to long-term fiscal stability. As oil prices and government revenues ballooned, so too did the size of public sector employment, and subsequently the overall wage bill.
According to the World Bank, government expenditure as a percentage of GDP averaged at 52 percent between 2005 and 2012, making it amongst the highest in the region. Meanwhile, the public wage bill between 2005 and 2010 averaged at 31 percent of total expenditure or 18 percent of GDP. In 2003, public sector employment was estimated at 1.2 million, and by 2015, figures show that it had peaked at over 3 million.
The first genuine attempt to curtail this trend came in 2016 when the government implemented a partial hiring freeze. With the exception of a few essential sectors including health and security services, new employment within the government was suspended. As a result, the total number of public sector employees, as outlined in successive federal budgets, fell from 3.03 million in 2015 to 2.89 million in 2018. An analysis of sector-by-sector employment reveals significant cuts within the military and security services, while growth in higher education and the oil industry was also stunted.
Budgeted public employment numbers, based on author’s analysis of allocations within successive annual federal budgets between 2011 and 2018.
The total number of budgeted employees within the Ministry of Interior has fallen by 12 percent compared to 2015, while the Ministry of Defence has seen even bigger cuts, slashing its personnel by 20 percent over the same period. The reductions can be attributed to a number of factors, namely the rooting out of so-called ‘ghost employees’ (people who are on the payroll but do not actually report to work), the casualties sustained by the war against IS and the forced retirement of many senior officers. As a result, the impact on recurrent spending has been noteworthy. Between 2017 and 2018, budgeted spending within the Ministries of Interior and Defence has fallen by 6.5 percent and 15 percent respectively.
Within higher education, employment grew by one-fifth since 2011, with only minor reductions to total sector employment since the hiring freeze was implemented. Meanwhile, continued investments in the oil industry has meant that the Ministry of Oil’s core bureaucracy (not including state-owned enterprises) has doubled over the past 7 years. As for the Kurdistan Region, cutting the size of the public sector workforce has posed major difficulties. While the KRG has implemented biometric data to address problems with ghost workers and ‘double dippers’, their total budgeted employees within the federal budget has not fallen, it has remained unchanged at just over 682,000 since 2016. The KRG has an even greater imperative to reduce the disparity in its wage bill, since Kurdistan Regional Government (KRG) employees represent nearly 24 percent of the Iraqi public sector, while its current share of the federal budget, calculated on a per capita basis, amounts to under 13 percent.
While reductions in nationwide public employment has meant that government salaries this year make up a smaller share of spending (33.4 percent) compared to last year (35.5 percent), the figure is still far too high. Factoring in state pensions and social support means that half of the government’s budget is spent on cash handouts.
Naturally, the biggest obstacle to a major restructuring of the wage bill has been the absence of a conducive political climate. During the run up to the 2018 parliamentary elections, campaign rhetoric by competing parties on government hiring reflected the lack of public appetite for any significant overhaul of the public wage bill. Negative campaigns asserted that the incumbent government was intending to slash salaries within the armed forces, which was fiercely denied. Given the protracted nature of the negotiations to form the next government, it is unlikely that significant progress can be achieved this year. Nevertheless, Iraq’s commitments to international lenders, including the stand-by arrangement with the IMF, should offer sufficient incentive to remain on the right trajectory.
A realistic way forward must feature a dual track approach that includes legislative and bureaucratic reforms. The existing legislation that defines public sector salaries dates back to 2008. A thorough revision is required to ensure that employees’ compensation is tightly controlled and hiring through the federal civil service council can be fully established. Additionally, modernising Iraq’s bureaucracy through a public financial management (PFM) approach will be critical, not only to enhance oversight on spending in Baghdad, but to assist sub-national authorities in navigating the ambiguities over decentralisation in the years to come.
*This blogpost introduces the LSE research project Payroll Expansion and the Political Marketplace in Iraq by Ali Al-Mawlawi, examining the nature of corruption in government salaries and expenditure. This project forms part of the Conflict Research Programme, funded by the UK Department for International Development to provide research and policy advice on how the risk and impact of violent conflict might be more effectively reduced through development and governance interventions.
Ali Al-Mawlawi is head of research at Al-Bayan Center, an independent public policy think tank based in Baghdad. He previously served as spokesperson for the Iraqi Embassy in Washington, DC, and research fellow at the Iraqi Institute for Economic Reform. He tweets at @aalmawlawi