Whence does addl revenue come to pay govt employees?

After nearly a decade, the government has approved a new pay structure for public employees. Under the National Pay Scale 2026, the starting basic salary for employees in the lowest 20th grade will rise from Tk8,250 to Tk20,000, while the fixed salary for the highest, first grade will increase from Tk78,000 to Tk1,56,000. Depending on the grade, basic salaries will rise by 100 to 142 percent. Various allowances and pensions will also be increased.

The decision is expected to provide some relief to public employees whose real incomes have eroded amid prolonged high inflation. However, economists warn that the move could also create additional pressure on inflation, government expenditure and fiscal management if the increased purchasing power is not matched by higher production and supply.

The new pay structure will not be implemented at once. Basic salaries are planned to be introduced in three phases between July 1, 2026 and July 1, 2027, while various allowances are planned to take effect from January 1, 2028. The phased implementation is considered important as it could prevent a sudden surge in money flowing into the economy.

The immediate impact of the new pay scale will be an increase in disposable income among public employees. This is particularly significant for lower-grade employees, with the basic salary of 20th-grade workers set to rise by 142 percent.

Higher income could increase spending on food, clothing, housing, healthcare, education and other essential goods and services. This could also stimulate domestic demand and provide a boost to businesses, including retailers, restaurants, transport operators and producers of household goods.

But stronger demand does not necessarily mean stronger economic growth. If production and supply fail to keep pace with increased demand, prices could rise further. Food, housing, transport, healthcare, education and other daily necessities could face additional pressure.

Therefore, the impact on inflation will depend largely on the pace of salary implementation, spending patterns, production capacity and market management.

One of the biggest challenges will be financing the increased expenditure. Around 33 lakh people�"including nearly 24 lakh military and civilian employees and more than 9 lakh retired employees and other eligible beneficiaries�"will benefit from the new structure.

The additional annual government expenditure is estimated at around Tk1,05,580 crore.

The key concern is whether the government will be able to mobilise the additional resources through higher revenue collection. If revenue growth remains weak, the government may have to borrow more or reduce spending in other areas to finance salaries, allowances and pensions. Such measures could put pressure on development spending as well as health, education and social protection.

M Masrur Reaz, chairman of Policy Exchange Bangladesh, considers the salary increase reasonable, particularly because public-sector pay has remained relatively weak compared with the private sector. However, he has raised concerns over the timing and implementation of the decision.

He said, “The major challenge lies in implementing the decision because government revenue collection is extremely weak and the economy is not in a very strong position.” According to him, the government needs to give greater priority to health, education and addressing the problems faced by ordinary people, while the huge additional expenditure on salaries and allowances could put further pressure on public finances.

Another major issue is the widening gap between public and private-sector employees. While public servants will receive substantial salary increases, many private-sector and informal-sector workers are struggling to keep their incomes in line with inflation.

Day labourers, small traders, transport workers and informal-sector employees will not directly benefit from the new pay scale. Yet they could face higher prices if increased demand pushes up the cost of goods and services.

This raises a broader question about whether the benefits of higher public-sector salaries can be accompanied by stronger employment and income growth across the wider economy.

The new structure also provides substantial benefits to retirees. Those receiving net pensions of Tk9,000 or less will receive increases of up to 100 percent, with pension increases ranging from 55 to 100 percent in phases.

The move could significantly improve the living standards of low-pension retirees. But it will also increase the government's recurring expenditure and long-term pension liabilities.

Dr Fahmida Khatun, distriguesed Fellow of the Centre for Policy Dialogue (CPD), said public employees' salaries had not undergone a major adjustment for a long time, while inflation and the costs of housing, education, healthcare and essential goods had risen substantially. As a result, particularly for lower- and middle-grade employees, real income and purchasing power had declined, making a salary adjustment necessary.
 
However, she stressed that the method of implementation would be more important than the salary increase itself.

“The additional demand created by higher salaries must be matched by increased supplies of essential goods and services, including food, housing and transport,” she said.

According to Fahmida Khatun, if the government finances the additional expenditure through excessive bank borrowing, increases in money supply or cuts in necessary development spending instead of raising revenue, it could create further macroeconomic pressure. She called for stronger production and supply systems, better market management and higher government revenue alongside implementation of the new pay scale.

The impact of the pay scale will ultimately depend on whether higher salaries translate into better public services and stronger economic activity.

If higher salaries increase consumption without a corresponding rise in production, the additional purchasing power could fuel inflation. But if increased demand encourages businesses to expand production and employment, the policy could provide a much-needed boost to domestic economic activity.

The real test of the National Pay Scale 2026 is thus not simply how much salaries increase. Rather, it is whether the government can finance the additional expenditure without undermining fiscal stability, while ensuring that increased purchasing power does not translate into another round of price hikes.