Question

In times of fiscal stress, governments are forced to look for budget savings or to make budget cuts. Because personnel costs are such a large part of government operating budgets, they are an immediate target for budget reductions. There are at least five ways governments can reduce the cost of personnel. Discuss each type and the pros and cons of each.

Answer 1

(1) Expenditure Ceilings

This is one of the most efficient and oldest methods used by most of the government in many parts of the globe, under this method the government sets a limit for their expenditure on personnel cost and on that basis only further decision for new recruitment and other promotions related issues are being taken

Pros: now different department can plan their demand for personnel according to the budget allocated to them, thus they will mainly focus on the necessary task only

Cons: due to the expenditure ceiling it may create hindrance in growth rate as the overall investment will decrease and the administration will try to only look on some of the specific projects to whom they consider important but there will be many projects that have to be stopped.

(2) Wage Negotiations

This is the way through which we can limit our expenditure by negotiating the wage with the personnel and it will help us in making a favorable decision for the budget cut down, however, it may create many problems due to labor unions and government labor laws

Pros: expenditure will decrease, even now we can hire more labor than usual at the same budget, worker will be satisfied with their pay as they have decided it with their own will.

Cons: firms will find it difficult to get top talents in the market as they prefer to go somewhere else, there are strict wage laws in many countries, labor unions may create a problem in the long term

(3) Pay Structure Revisions

It will be useful only when we have a service-based industry rather than a production unit because in the service industry we can go for a pay structure revision based on the personnel skills and experience, and their job specification so for a person who has direct contact with the customer can ask for a higher wage than other backend personnel whereas in production it would become much difficult to differentiate between frontend and backend worker and thus we cannot have a different pay structure for them

Pros: personnel having high skills will be paid well, we can retain top talent in the organization

Cons: personnel who are getting low wages may start looking for a job somewhere else and they remain unsatisfied

(4) Staff Ceilings

In this method of budget-cutting, we always fix the number of personnel that can be used on different department based on their past demand however it will also create a problem during peak season as we need more employees during that time

Pros: employees will be more effectively used and efficiency increased as now work has been clearly distributed among all

Cons: seasonal increase in demand cannot be fulfilled most of the time however inventory can be used for it but even though there is a chance for some loss, employees may have no free time, it may demotivate them

(5) Sectoral Policy and Programme Analysis

definitely, the government can program some sectorial specific policy based on the market analysis and it will be better for the future personnel demand forecast, further proper analysis will help the government to know which one to give more priority and which can be imported at a low cost.

Pros: future requirements of the employees in the different sector can be predicted, and depending on it we can decide our budget for their wages and other benefits,

Cons: it is time-consuming and always variable in nature thus finding an accurate number for the process will not be possible.