Serbia's public sector wage billconstitutes a significant share of total governmentexpenditure. At present, it is significantly higher than inmost neighboring European Union (EU) member countries. Thisis largely due to higher average levels of compensation,rather than higher levels of staffing. While wage spendinghas fallen recently this is not the occasion to be sanguineabout the Government's wage and employment policies.There are two reasons. First, continuing control over thewage bill is a key part of the Government's overalldeficit reduction strategy. Given the Government'sreluctance to raise taxes and the difficulty it confronts inreducing other major categories of expenditures(particularly pensions), restraining the wage bill iscritical to fiscal sustainability. In connection with itsstandby arrangement with the International Monetary Fund(IMF), the government is committed to enacting fiscalresponsibility legislation which would cap wage billspending at eight percent of gross domestic product (GDP)over the medium term. To date, the Government has beenrelying on blunt instruments to achieve this target; mostimportantly a freeze on nominal wages and a partial freezeon the creation of new positions, both introduced in 2009.As the current recession eases, pressures to increase wagesare mounting. The wage freeze is becoming politicallyunsustainable. More nuanced methods of restraining the wagebill are required. Second, over the longer term, the presentpolicy of continuous wage and position freezes wouldundermine the quality of public administration. Persistentwage freezes would make it difficult to attract and retaincompetent staff. Persistent position freezes would lock inexisting patterns of over- and under staffing. On the otherhand, a reversion to the former system of ad hoc adjustmentsin staffing and wages could set the stage for unsustainablewage bill growth in the future. Structural reforms aretherefore required.
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