Ministry of Finance freezes public sector wages

The need to reduce the public deficit has forced the Greek Ministry of Finance to decide not to increase the basic salaries of civil servants and public sector pensioners, but to provide aid in the form of an allowance and only to specific categories. Thus, this allowance will not be paid to all civil servants and pensioners. The government decision was made public in mid March 2009 and was strongly opposed by public sector trade unions, which went on a general strike on 2 April.

Incomes policy for civil servants and public sector pensioners

On 18 March 2009, the Minister of Economy and Finance, Yannis Papathanassiou, announced that – due to the negative impact of the current global economic crisis on servicing the state budget deficit – the basic salaries of civil servants and public sector pensioners will not be increased for the current year. This decision affects employees at ministries, magistrates, professors, doctors at public hospitals, those working in public security forces and armed forces, and local government employees. Instead, the incomes policy implemented during 2009 for public administration employees and pensioners is as follows.

  • Those earning gross pay of over €1,700 a month will not receive any pay increase or financial aid. In addition, public sector pensioners whose pension exceeds €1,100 a month will not receive any increase or allowance for 2009. It is estimated that this measure will affect some 478,000 civil servants and 340,000 public sector pensioners. In essence, based on the estimated inflation and taxation of their income, these categories will suffer a decrease in their actual income ranging from €357 to €525 a year.
  • Civil servants earning gross monthly pay of up to €1,500 will receive a tax-free allowance of €500. The same allowance will also be paid to public sector pensioners receiving a monthly pension of up to €800. It is estimated that the €500 allowance will be granted to 135,000 active workers and 1,180,000 public sector pensioners.
  • Those earning gross monthly pay ranging from €1,501 to €1,700 will receive an allowance of €300. The same sum will be paid to pensioners receiving a monthly pension ranging from €801 to €1,100. It is estimated that this allowance will be granted to 78,000 active workers and 290,000 public sector pensioners.

Based on initial estimates, the savings from this freezing of salaries and pensions will amount to about €300 million.

Effects of incomes policy

The government decision to grant an allowance to just some civil servants and public sector pensioners, instead of raising the basic salaries for all, has two direct long-term consequences on the earnings of civil servants.

Firstly, with regard to calculating the pension granted to civil servants, this is based on their basic salary over the last five years prior to their retirement. Therefore, given that no increase in the basic salary will take place during 2009, civil servants should not expect any additional amount in the calculation of their final pension from this year.

Secondly, if the government decides to increase the basic salaries over the years to come, such a raise will be based on the basic salary of 2008, given that no increase has been granted for 2009.

Acknowledging the turmoil caused, Minister Papathanassiou stated:

the decisions we make are certainly difficult; I believe we all understand that we are going through an unprecedented crisis. There is only one possible responsible and realistic policy – to reduce drastically public expenditure; there is no other permanent solution.

Trade union reaction

Trade unions strongly opposed the announced incomes policy. The President of the Confederation of Public Servants (Ανώτατη Διοίκηση Ενώσεων Δημοσίων Υπαλλήλων, ADEDY), Spyros Papaspyros, declared: ‘the fact that increases for employees and pensioners are being frozen is a sign of bankruptcy of the government’s policy’. He also emphasised that ‘the announcements have frozen all Greek citizens but will not freeze our strike to be held on 2 April’, thereby calling a general strike for early April 2009.

Commentary

Having declared its goal to reduce the state public deficit, the government is trying to attain this objective by taking steps mainly related to the earnings of civil servants. This strategy, however, will be short term since the freezing of pay increases for all civil servants and pensioners cannot last for a long period of time. Therefore, the benefits generated by such a policy can only be of a limited time horizon, dictated by the exceptional circumstances surrounding the global economic crisis. The main policies for rationalising public expenditure should aim to provide incentives that will boost the economy by developing a public sector model characterised by major public investments in modernisation and enhancement of productivity.

Stathis Tikos, Labour Institute of Greek General Confederation of Labour (INE/GSEE)

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