Whilst the new Coalition government in the UK considers its options for budget reductions next month, many EU countries are revisiting their large public sectors and taking action to bring down costs.
Cutting Ministerial salaries is popular. The 5% UK cut is similar to the cuts in Portugal. Spain has cut Cabinet salaries by 15% and Romania and Greece have also put through pay cuts. Several countries have widened the pay cuts to include senior officials. France has announced a 10% cut in state operating costs, and has frozen total spending save pensions and interest payments. Portugal has stopped certain high profile capital projects. Greece is running a pay freeze for the public sector until 2014 and has cut public sector allowances and bonuses. Spanish civil servants are experiencing a 5% pay cut.
Action is also being taken on pensions. In the Netherlands the retirement age is being raised to 67. Greece is putting the female retirement age up to 65 from 60. Spain is freezing pensions. Romania is putting through benefit cuts.
The profiles for deficit reduction include:
Borrowing as a percentage of National Income
Spain 11.2% 2009 9.3% 2010 6% 2011 3% 2013
Greece 13.6% 2009 8.1% 2010 7.6% 2011
Portugal 9.4% 2009 7.3% 2010 4.6% 2011
The problem for many of these countries is that stuck in the Euro zone without the ability to print money and to devalue, their private sector growth rates may remain poor. Some of them have added to the difficulty by putting through large tax increases. Portugal has imposed an extra 2.5% tax on profits, more than 1% extra on Income Tax and raised the top rate of VAT to 21%. Greece has put VAT up to 23% from 19% and increased Excise duties by 10%. Even Germany, with a lower deficit, has announced no planned tax cuts after all.
More states should be looking for things the government need not be doing, and should be doing more to cut the costs of the government overhead. The EU could make a contribution to getting member states’ budget deficits down by cutting its own financial demands on its members.
Higher taxes on consumption where a country is in balance of payments deficit is less harmful than extra taxes on work and investment. It is all part of the process of cutting living standards where a country has been living beyond its means for too long, relying on borrowed money. In the Euro direct cuts in living standards by cutting pay is more common. In the US and UK cutting living standards by allowing the currency to fall is more common. Sterling fell to $1.46 yesterday, reminding us the markets are not going to wait too long before wanting proof that there is a new strong grip on the nation’s finances.