The
paper finds that expenditure based consolidation be inclined to be more
successful than revenue based consolidation. But we should not focus principally
on reducing the public sector wage bill without considering the revenue side of
public finances. This would imperil a sustainable recovery in European Union
member states. The paper identified spending for public sector wages has
increased faster than GDP in EU member states and it contributes to the problem
of government deficits in member states. Increase in government wages should be
targeted to assuage skills shortages. If not, it may undermine EU member states
external competitiveness. The paper identified minimum wage bill is best for
economy because wage policy is accountable for current account imbalances in member
states deficit countries and allows wage bill really accountable for the huge
national debts. Moreover, wage increases have undermined the competitiveness of
the member states. The paper recommend envisage fundamental intrusion in the
wage policy of member states to boost the competitiveness. In addition, member
states should pursue wage policy of both private and public sectors
productivity and average inflation is vital. So that this would preclude sliding
pressures on wages and sustain employees purchasing power. This would
contribute to a steady and stable economic growth within the member states and
across the business cycle in member states. This would assist to avoid
imbalances in global competitiveness. The public expenditure categories include
public wages, compensation, public transfers and subsidies, interest payments
on government debt for instance, domestic financing and external financing,
public capital expenditures and other goods and services. The paper recommends
that member states should curb public expenditure as a strategy for fiscal
consolidation and reduction in domestic financing of the deficit is expected to
trigger higher growth rate of member states.
The
paper finds that member states especially CESEE official statistics, government
wage bill in public sector particularly social payments and compensation of
employees rose prior to the global financial crisis 2008. The public sector
wage bill represents between 50 to 60 percent of government consumption
expenditures. As a result, higher share of public spending on social payments
before global financial crisis most damaged European Union member states fiscal
consolidation. Cuts in highly productive public employment and productive
public spending damaged fiscal consolidation because cuts in highly productive
employment reduce overall productivity and it generate negative wealth effect.
As a result, future tax would fall significantly. Similarly, cutting public
investment would damage fiscal consolidation largely. Member states public sector wage bills are
generally higher than private sector. The paper recommends public sector wage
should be lower than the private sector and public sector wage must compete
with high private sector. It also finds that cuts in non-productive government
spending, weakly productive public employment and safeguarding capital
expenditures during fiscal adjustments generate fiscal consolidation if there
is a perfect competition in the labour market. So labour market reform is
obviously necessary for fiscal consolidation if consolidation pursued through
cut in weakly productive spending. The paper also addresses the impact of the
government wage bill policies on the size of the health wage bill in the public
sector.
The
paper finds that eliminating costly and incompetent tax expenditures would help
increase government revenues. The paper recommended member states should commit
to cut in tax expenditure for 2013 because the revenue cost of the tax
expenditure is estimated to be as high if the tax expenditure in the social
security budget are added in. However options for expenditure consolidation,
for instance, wage policy and tax expenditures differ by country. Portugal has
no fixed rate on wages. Similarly, the revenue cost of the tax expenditure is
estimated to be 1 percent of GDP in Germany whereas it accounted for 3.4
percent of GDP in France but if the tax expenditures in the social security
budget are added in overall figures comes to 10 percent of GDP in France. I
tabled tax expenditure in both budget and social security budget bill for all
European Union member states for 2014. This would provide obvious information
on tax expenditure of all member states including those on social contributions
and their ability to meet fiscal consolidation.
This
report clearly shows how much further EU member states need to go to meet the
fiscal goals through structural reforms, public spending cuts and tax
expenditure. Policy discussions reveal that six main adjustment policies such
as wage bill cuts, pension reforms, eliminating subsidies, labour reform,
healthcare system reform, and cuts in tax expenditure are being considered
until the member states budget returns to surplus. Member states must move to
reduce its public spending at faster rate to fiscal consolidation. In summary,
member states will have to follow significant cuts in public spending, cuts in
tax expenditure and pension reform to maintain the Stability Pact without increasing
tax burden or even cutting it. Tax increases will make the maintenance of
Stability Pact even more difficult. It may lead to a vicious cycle. The paper
finds that there is a substantial scope to member states to overcome the
current challenges by sharp reduction of public spending, cuts in tax
expenditure and pension reform. It is my hope that my analysis will provide
member states with the recognition and impetus to change ahead with their
detailed fiscal consolidation plans for 2014 and to regain foreign investor
confidence.
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