Trends and Composition of Public Expenditure

Trends and Composition of Public Expenditure

8. 
   The economic classification of expenditure shows a stable pattern of expenditure. Throughout the last 5 years, on average, 64 percent of resources financed the recurrent expenditures, while the remaining resources (on average, 36 percent) paid for the public investment program (PIP) (table 2.6). This broad distribution is affected by annual variations that are explained by the unpredictable execution of the current PIP and, to a lesser degree, by the privatization costs of some public enterprises that spilled over from the late 1990s to the first half of the current decade. In 2002, 2003, and 2004, the cost of privatizations reached 0.3 percent, 0.8 percent, and 0.3 percent, respectively, of total public expenditures.
   
9. 
   The expenditures pattern for 2002–06 highlights the continuous dominance of nondiscretionary expenditure. The three categories (salaries and benefits, transfers and subsidies, and payment of interest rates) represented on average 83 percent of total recurrent expenditures and 53 percent of total expenditures. Continued increases of nondiscretionary expenditures will restrict the fiscal space available to the government to react to external shocks. In the medium-long run, the implementation of some reforms will decrease their weight in the budget. However, it is important to emphasize that, in the short run in a constrained budget, if the government does not wish to increase the overall deficit, the weight of any potential budgetary cuts resulting from a negative shock would fall onto discretionary expenditures such as goods and services or the investment budget.
   
10. 
    The share of salaries and benefits to GDP increased from 9.6 percent in 2002 to 12.7 percent in 2005, an increase of 30 percent. In absolute terms, this share increased by 84 percent from 2002 to 2007, or approximately 10 percent a year. This increase reflects the impact of various salary increases instituted during the first half of the decade to improve the standard of living of civil servants. It also reflects the hiring of teachers and health care professionals, and reinforcements for the police force for public security. For 2007, the expectation was that salaries and benefits would represent approximately 12.3 percent of GDP. To contain the escalation in wages and benefits, the government has decided to freeze promotions and recruitments⁷ until the Plan Positions, Careers and Salaries (PCCS) is revised. Furthermore, the validation of the civil service database, which began in August 2006, has been completed and integrated with the payroll. The validation brought about some savings by eliminating some “ghost” civil servants from the payroll. Given the budget constraints, the government should pursue measures to restrict the growth of the wage bill. Furthermore, in the context of the revision of PCCS stricter conditions should be defined for promotion and for eligibility to the “quadro privativo”⁸ status.
    
11. 
    The recently approved decree (Decreto-Lei 21/2006) on pensions contributes to an increase in salaries and benefits’ share of the budget (already reflected in the 2007 budget). With the new law, the responsibilities of the state as an employer increased significantly. While continuing to pay pensions to all civil servants who joined the public sector before December 31, 2005, the government also must transfer contributions to the Instituto Nacional da Previdência Social (INPS). The monthly transfers to INPS include 23 percent of the wage bill of the new civil servants, plus 8 percent of the current active civil servants and pensioners (for the health program). Even though, in consolidated terms, there is a gain in moving civil servants to the INPS system, because it provides fewer benefits, the integration worsens the unsustainability of the INPS (a contingent liability).⁹ The implementation of parametric reforms––which should consider either a raise in the contribution rates or a substantial cut in benefits¹⁰––has been under consideration. Estimates of the impact of a number of reforms were undertaken in the 2006 PER.
    
12. 
    Within the group labeled “social transfers and subsidies,” the government was successful in controlling the cost of scholarships. This category covers transfers to other government levels (autonomous institutes and municipalities) and subsidies for petroleum products, as well as transfers for embassies and for students abroad. As in 2002, the authorities decided to reduce funds for financing public scholarships and went on to encourage participation in costs by students and families eligible for these scholarships. It is estimated that the expenditure on scholarships was reduced by almost 44 percent between 2002 and 2006 (from 555 million CVE in 2002 to 314 million in 2006).
    
13. 
    The amount of oil products subsidies registered in one year’s accounts often relates to previous years. Therefore, the account readings are very misleading. Because of Cape Verde’s cash basis approach to the budget,¹¹ one year’s subsidies usually are carried forward to the next years’ budget. This practice seriously understates the current fiscal position. The budget does not provide adequate support for planning and monitoring current-year spending priorities against current-year resources.
    
14. 
    Furthermore, oil subsidies often are not recorded as subsidies, but rather as “extraordinary expenditures.” Other times, they are not recorded at all in the budget. As the payment of subsidies relates to previous years’ budget, often times the subsidies are recorded as “extraordinary expenditures.” Other times, the subsidies payments are not registered at all in the budget, because payments due to the oil companies are converted in protocols, a common practice in Cape Verde.¹² As a result, actual payments of oil subsidies are much higher than presented in the budget.¹³
    
15. 
    In April 2006, subsidies on oil products were eliminated to protect the budget from open-ended commitments. Nevertheless, given the lack of adjustment of prices by the Economic Regulatory Agency (ARE), subsidies continue to exist. As lags in the adjustments of the prices have been consistent, government covers the difference (between the import price and the price established by ARE) to the oil companies.¹⁴ For instance, referring to subsidies covering May-December 2007, the amount due to Shell, (after subsidies had been eliminated) was converted into a protocolo: CVE 123 million. Furthermore, because the elimination of the subsidies was not reflected in an adequate adjustment of electricity and water tariffs, tariff deficit was accumulated toward ELECTRA (the water and electricity company): in May 2006-February 2007, CVE 550 million.
    

Table 2.11: Expenditure 2002–07 (% of GDP)

16. 
    Interest rate payments have been decreasing steadily during the analysis period. Table 2.7 shows that interest rate payments decreased from 8 percent of total expenditure in 2002 to 5.4 percent in 2006. During 2003–06, these payments reached an average of 6.6 percent of total expenditures (2 percent of GDP). It is expected that, as a result of the decline in borrowing (as percentage of GDP), interest payments will continue lessening.
    

2 Approved budget.

17. 
    There are pending questions of risk assumption by the government concerning state-owned enterprises (SOEs), autonomous institutions, funds, and simple services liabilities. Autonomous institutions have their own limited resources but also are recipients of large budget transfers (table 2.9). Government data indicate annual transfers ranging from 2.4 billion CVE–3.3 billion CVE. In the long term, these large transfers appear to question the autonomous nature of these institutions, as well as the soundness of such an arrangement. An in-depth analysis should be conducted, provided solid data are available. Regarding the SOEs, a study of the liabilities of TACV (Cabo Verde Air Lines), ENAPOR (port authority), EMPROFAC (distributor of pharmaceutical products), INTERBASE (frozen fish company), and Empresa Nacional de Aeroportos e Segurança Aérea (ASA) (airports) could shed light on implicit risks for the central budget. The Ministry of Finance and Public Administration has set up a unit to follow up on state participations
    

Recommendations

18. 
    Better control of nondiscretionary expenditure and open-ended commitments is needed to guarantee adequate fiscal space and ability to cope with potential shocks. Furthermore, to help plan and monitor current-year expenditures against current-year resources, it is important to record all expenditures and revenues. The following measures should be taken into account:
    

• 
  Continue restraining the wage bill.
  
• 
  Take greater control of transfer effectiveness (for example, payment of scholarships).
  
• 
  Reduce open-ended commitments.
  
• 
  Record all expenditures and gross revenues in the appropriate category in the budget, in the year they are relative to.
  
• 
  Apply the automatic mechanisms for oil petroleum products and utility tariffs, in line with the legislation.
  

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