EU MEMBER STATES WAGE POLICY ANALYSIS - 2013

This paper exclusively analyses different European Union countries government wage bill and how the government wage bill cuts to help European economies to overcome the current challenges. European Union member states have the mixture of fiscal austerity, raise in unemployment and wage cuts was jump to result in a severe reduction in economic activity. European Union member states fiscal consolidation can accomplish through structural measure, cutting public expenditure such as public consumptions and social transfers than adjustment based on revenue increases. Structural measure particularly pension reform is most enduring effect achieving fiscal consolidation. This paper recommend EU member states would have to phase in pension reforms on the German model to accomplish member states fiscal goals.

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.