Article

Austerity Europe - John Redwood Comment

May 14, 2010

The massive package of guarantees and loan facilities to Euroland members has been followed by more austerity measures in several EU states. The new UK coalition government is just beginning its look at the books and its discussions on how it can start to trim public spending. Meanwhile on the continent and in Ireland they are pressing on with a mixture of tax increases, pay reductions and spending cuts to try to combat the mighty deficits.

In Greece there will be a public sector pay freeze until 2014, allied to a 12% and a further 8% cut in public sector allowances to employees. VAT has gone up from 19% to 23% and women will have to retire at 65 instead of 60. In Ireland there have been pay cuts and tax rises. The Netherlands has increased the retirement age to 67.

Spanish senior civil service and Ministerial salaries have been cut by 5% then frozen. There have been substantial cuts in capital spending and local government. The baby payment has been cancelled. Cabinet salaries have been reduced by 15%. In Portugal there are 5% cuts for Ministers and senior officials, higher VAT has gone up to 21%, Income Tax is up and profits tax up by 2.5%. Prominent capital projects are being stopped.

This is both good news and bad news. It is good news that at last the authorities are taking seriously the need to curb deficits, before more EU countries get into Greek difficulties and face a vertiginous climb in the cost of state borrowing. The bad news is these measures, especially some of the tax increases, do not help economies to recover and generate more tax revenue from growth. Living standards are going to fall, in some cases substantially.

The danger for the Euro zone is the cure for the budget crisis does not help solve the problem of too little private sector growth and demand. Without more energetic policies to promote enterprise, private sector job growth and more productive investment the prognosis for the Euroland economy is not good.

Cutting public sector pay and spreading the pain may be a sensible first step, but there is no substitute for identifying functions and activities that the public sector need not do and closing them, and for improving the general efficiency of the public sector at what it does need to do. You then need a thriving free enterprise sector to take up the slack. Without that public spending remains high as you meet unemployment claims and face continuing disappointment with tax revenues.