Mediterranean Countries’ Manly Response to Crisis

During the recent general election none of the three main parties made any serious mention of the way they planned to eliminate the £170 billion government deficit run up by Labour.  The main argument between the Labour and Conservative parties was whether national insurance contributions should or shouldn’t go up by 1% of wages, equivalent to about £6 billion of revenue received or not received.  The LibDems of course concentrated on handouts, notably raising the income tax threshold to £10,000.

Public sector labour costs (wages and employers’ national insurance contributions plus employers’ pension contributions) account for about half the government’s approximate £670 billion expenditure, the other half being accounted for mainly by benefits, capital expenditure, buildings and debt interest.

The temptation for the new coalition government will be to leave public sector labour costs largely untouched, to avoid howls of dismay and union disruption. It is clear, however, that the public sector labour force is just too large (over 8 million) and too costly (average wages and employers’ pension contributions are considerably greater than those in the private sector) for the private sector to bear.

By contrast with the flaccid British political response to the huge crisis, it is worth noting the altogether more manly approach being adopted in Greece, Spain and Ireland, all of which have directly faced a 20-30% public sector overspend by cutting public sector wages on average by 5% (Spain), 10% (Ireland), 16% (Greece), with top earners bearing a higher percentage cut than the lower paid.

It is at least arguable that a major result of similar cuts in Britain would not only be to reduce our internal deficit very quickly, but would also reduce our external trade deficit as a consequence of more holidays being taken at home and fewer abroad!


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