04/10/2010

Thoughts on Austerity

  

The following considerations are liable to displease a number of “well meaning” members of the political, economic and civil service communities. They were inspired by the European Trade Union demonstrations “Against Austerity” that took place in Brussels on September 29th.

The choice of the slogan was no doubt regrettable because demonstrating “against austerity” when it is in any case unavoidable, is as useless as demonstrating against flu on the eve of autumn. This unfortunate “error” allowed those to whom the demonstrators were addressing themselves, to get away with a few rational – though paternalistic – sounding phrases such as “the austerity measures taken by your governments (and the pressure of financial markets) are motivated by what they believe to be in your best interests…” It is clear, however, that the authorities were fully aware that the trade unions were not demanding the pure and simple cancellation of austerity measures but, rather, were insisting that their impact should be spread around in as fair a manner as possible.

I will not try to hide that my sympathies were largely on the side of the demonstrators, as it is becoming ever clearer that the sacrifices imposed on the population within the framework of the various austerity plans – in place or announced – take little account of the capacity of citizens to weather their consequences. Furthermore, the programs induce indirect effects which, at best, slow down and, at worst, abrogate any hope of economic growth. This affects profoundly the living conditions as well as the aspirations of the most fragile elements of society, be it in terms of employment on the one hand or of the remuneration (close to zero) of small savings accounts on the other.

Thus, I was particularly shocked to note that the cuts in civil service pay (in Greece or Spain) hit indiscriminately those at the bottom of the scale, earning between €1000 and €1500 a month and those at the top earning between €8000 and €20000. A uniform 10% cut hits the former in their primary needs, while the latter suffer only from a reduction in their discretionary income. Similarly, reductions in social services affect mainly those who are most in need.

In contrast to these blatant “injustices” one should take note that, contrary to the myth of a tax payer “bail out” of the banking system, no significant tax increase have yet been enforced (except the proposed removal of €10 out of 70 billion of French tax “niches” and the still controversial expiration of the Bush tax cuts for the wealthiest), the financing of government intervention having been secured through indebtedness. Such a choice, for interventions limited to the banking sector, was perfectly justified insofar as the net balance should prove positive for most national Treasuries (except for Ireland and Iceland). What remains deliberately overlooked is that the banking crisis was the direct cause of the ensuing most severe economic crisis since the 1930’s, creating an ongoing responsibility of the banking sector for the further deterioration of budgetary imbalances. It is this specific link that, in addition to the necessity to “pre-finance” the cost of future restructurings, fully justifies the proposals, being considered at G20 and EU level, to impose additional taxes on banks. Quite to the contrary, the latter continue to benefit of a level of official support that exceeds by far anything being considered for the other sectors of the economy.  The maintaining of the ECB’s refinancing rate at 1% in conjunction with the “unlimited” provision of liquidity, provides the banking sector with quasi riskless arbitrage opportunities (for instance the purchase of Greek 3 and 6 months Treasury bills whose repayment is secured by the €110billiob 3 year credit facility jointly provided by EMU members and the IMF).  In this manner, a vicious circle is created in which the most fragile States are in direct competition with their own private sector to secure the financing they need. Such a situation, abetted by the ECB’s policies, should lead in short order to conflicts of interest within the future European Systemic Risk Council, as the interdependence of Member States and the banking system becomes even more acute than in the past. In addition, when such a scenario engenders the spectacular recovery of banking profits, justified by the need to rebuild their capital base to “protect the system”, but serving also as an even more shocking alibi for the resumption of bonus payments, it is hardly surprising that questions are being raised regarding the unhealthy stranglehold that the banking lobby seems able to exercise over Public Authorities.

It is within such a precise context that one should evaluate the aggravation of budgetary deficits due to the triple causes of a decrease in tax revenues, an increase in social expenditures (unemployment, healthcare) and the cost of stimulus packages, which has been financed nearly in total through the increase of Government indebtedness, harbinger of future higher debt servicing costs. Thus, the taxpayer has – temporarily – been largely insulated from bearing the cost of the crisis.

The real “victims” to date are those who have lost their jobs (or, in the case of the younger, have been unable to find one) and the small savers who were wiped out and who, unlike the wealthier, did not have the capacity to benefit from the recent recovery in financial markets. It is this reality that should be at the heart of the calibration of any proposed “austerity measures”, whose necessity is unquestionable but whose design must include social justice objectives if they are to stand a chance of carrying the approval of citizens at large.

It is within such a framework that I wish to put forward three proposals.

The first is aimed at the Civil Service and in priority at the European Civil Service. I suggest that the Secretaries General of all the European institutions, in consultation with the Trade Unions, propose to the Budgetary Authority a “reduction” in compensation of Civil Servants (and retirees of which I am one) on the basis of the following principles: for remunerations

Ø  up to €1500 per month, no reduction.

Ø  up to € 3,000: reduction of 5% on the second tranche of €1500 (i.e. a maximum of €75 per month or 2.5%)

Ø  up to € 6,000: €2925 plus a reduction of 10% on the last tranche (i.e. a maximum of € 375 per month or 6.25%

Ø   up to €10,000: €6625 plus a reduction of 15% on the last tranche (i.e. a maximum of €975 per month or 9.75%

Ø  Over €10,000: a reduction capped at 12%.

There is no doubt that such an initiative would have an enormous impact on public opinion and would provide the EU with considerable moral authority. Its power of influence would be considerable reinforced, disarming its detractors always ready to denigrate the European civil service and would - at last - provide an example coming from the top. This model could help amend some of the most flagrant injustices contained in existing programs. The budgetary impact would be significant both at European level and for Member States that would follow suitnote1.

My second proposal is aimed at reinforcing the personal responsibility of Corporate Directors. I suggest that all insurance policies covering the personal liability of Directors should include a “deductible” equal to the payments they received during the last 3 or 5 years. This would considerably decrease the premiums and entice Directors to exercise’ due care in the performance of their duties. (This measure is the logical complement to the spreading of bonus payments over several years as recommended by the G20).

The third, that I have already made previously, concerns the limitation of the tax deductibility of remunerations in general. Should be considered eligible as a cost of doing business remunerations (in any guise: salaries – bonuses – retirement benefits etc.) that would conform to a preset norm (say 30 times the remuneration of the lowest paid employee with a cap at €750,000) Any remuneration that would exceed the norm or the cap would be payable – without any limitation - but out of “after tax income” and would be subject to shareholder approval at the time they vote on the accounts, retained earnings and dividends. The corporate tax base would be commensurately broadened.

These three proposals demonstrate that it is perfectly possible – if the political will is there – to make coincide objectives aiming at budgetary consolidation with the reinforcing of personal responsibility while taking into account social justice, however imperfect it shall remain.

In the present context, the arrogance and airs of superiority conveyed by those who hold power, together with the pretence of all encompassing knowledge, are no longer an acceptable response to the challenges to be faced. Short of adopting a path where, in addition to competence, significant consideration is given to social justice, the tensions, that are surfacing more intensely with every passing day,  risk to create chaos from which the vast majority of citizens, including the wealthier, will emerge as losers.

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Note 1. The introduction of this measure should be subject to a prior condition: the rigorous application of the « method » to the 2009 salary adjustment process because the unilateral violation of the existing contractual arrangements by the Council is totally unacceptable.

09:30 Écrit par Paul N. Goldschmidt 13 Ave. Victoria 1000 Bruxelles | Lien permanent | Commentaires (0) |  Facebook |

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