Until very recently Greece was seen as a successful, catching-up European Union country, albeit with some worrying socio-economic blemishes. It is fast on its way to becoming what used to be called a Third World country. It is certainly being treated as such by the ‘troika’ of institutions (EU, ECB, IMF) offering it financial support subject to strict conditionality.
They have now threatened to withhold further support unless deep cuts are made in public spending. Yesterday the Greek finance minister announced that 150,000 public sector jobs, 20% of the total, would be cut. He said that Greece needed to implement cuts immediately
not because it’s imposed from abroad but because it has to happen now, as quickly as possible, for the sake of our children.
The only question is which of the two parts of this sentence is the more fatuous. The fact is that EU institutions and international lenders are forcing a European Union country to implement the same self-defeating pro-cyclical austerity policies and so-called ‘structural reforms’ that have caused such damage in numerous less developed countries in past decades.
Greece’s output and employment continue to contract, not least in the face of past austerity measures, now deemed insufficient. How dismissing 20% of the public sector work force – technically they are to be transferred to to a reserve on 60% pay, but this is obviously a functional equivalent of unemployment – can be in the interests of Greek children, or for that matter the country’s adults and senior citizens, is hard to see.
The first issue is the impact on aggregate demand.
Let us initially suppose, purely for the sake of argument, that all these 150,000 public servants do no useful work at all in their current employment. After their dismissal they will for the foreseeable future also do no useful work. Their net income will be down by somewhere of the order of say 30% (let us suppose that a quarter of the 40% gross income loss goes in reduced income taxes and contributions). As they will see little prospect of higher earnings in the near future, aggregate demand will be reduced more or less one-for-one.
Obviously the 10% of their salary bill in taxes and contributions takes the form of a shortfall in government revenue, so that the direct effect on government budgets is a saving of around 30% of the salary bill. But the reduced demand will have knock-on effects on tax revenues and spending on unemployment and other benefits. Once these ‘negative multiplier’ effects are factored in, the savings will be far lower and output and employment will be lower. What is preventing Greece from raising output and employment at the present is not the real or imagined inefficiency of its public sector. It is a lack of aggregate demand. This medicine will make the patient sicker not better.
Even if you think that the Greek public sector is highly inefficient – and Greek colleagues assure me that this is not just a Conservative caricature – at least some of the dismissed workers will have done something useful at least some of the time. This productive work, much of it which will have positive effects on private sector output, either current or future, will go undone. These losses cannot be readily quantified. Improving the efficiency of the public sector is a laudable aim. But simply sacking (sorry, ‘transfering to a reserve’) 150,000 workers is not likely to be a good way to do it. And if you do want to reduce the size of the public sector, then do it when private sector employment in expanding.
But let’s come back to that idea of reducing the size of the Greek public sector. It is widely perceived, and explicitly described in the cited FT article, as ‘bloated’. Well, we can consult our prejudices about that or we can look at the facts. Official EU data (from the AMECO database, all from 2008 the last year for which such a comparison can be made) show that the wage bill of the Greek public sector represents 12.1% of GDP. Is that bloated? Well, it is about 2 percentage points of GDP above the euro area average. But it is very much lower than the Scandinavian countries, and roughly equal to France and Belgium. it is only about 1pp higher than those neo-liberal paragons the UK and Ireland. It is hard to imagine that this wage bill is what has dragged Greece down. Yes, Greek public servants are almost certainly less productive than Danish ones, but then the same is true of the private sector and, as argued, massive job culls are not the way to enhance productivity.
The EU data also allow us to look at a breakdown of the public sector wage bill by broad function. They do not suggest that the problem is overmanned Greek social-security offices doling out benefits. Greece spends a full percentage point of GDP more than the Euro area average, and considerably more than any other country, on paying its soldiers, sailors and airmen. It is also a big spender, in relative terms, on public order and security. In contrast the wage bill in the area of social security is rather below the euro area average.
I don’t know exactly where the Greek government plans to swing the axe, but if swing it you must then the military would seem to be a good start. Cutting down on policeing – as also the UK has discovered – will be hard, though, when public order is constantly under threat from those protesting austerity measures: this is a negative multiplier of a rather different sort.
Another obvious question would be why focus on the spending rather than the revenue side? And a quick look at EU statistics shows that total government revenues (again the figures are from 2008) were more than five percentage points below the euro area average. Of the euro area countries only Ireland and Spain had a lower tax take as a share of GDP. (Of course these countries are also being enjoined to slash spending rather than raise revenue.) One way of looking at this is that, mathematically, if Greece raised its revenue-raising capacity to the euro area average level it would approximately halve its current budget deficit.
Of course this is a purely mathematical calculation, not a short-term policy recommendation: this too would have a negative multiplier effect, although, if properly targeted, it would be less than sacking public sector workers on modest salaries. It would also be much fairer. Indeed, if we look at the revenue breakdown by source, we see that indirect taxes (which tend to be regressive) account for a greater-than-average share of GDP, whereas social insurance contributions and, especially, direct income taxes (which tend to be progressive) are substantially below the euro area average.
Given these – readily available – facts, in a situation of depressed demand it is an economic no-brainer that if you want to achieve short-run consolidation you should if anything raise taxes and contributions on high income earners. Surely it should be all the more a no-brainer for a socialist government.
But that is not the policy recommendation of the lenders who hold the purse strings. For either electoral or ideological reasons, or both, they want to see the patient bleed. And they have their own agenda for where the cuts should be made.
But of course it’s all in the interest of Greek children. The Greek finance minister told us so himself.