EKIP– Expert Club for Economics and Politics A Different Opinion
Yesterday, the government announced its intention to increase the salary levels in the state administration by 10%. The measure is expected to come into effect from January 1, 2019, and according to initial estimates, it will cost all of us taxpayers between 800 million and 1.1 billion leva. This is certainly great news for all civil servants, but for all of us who are interested in how the state spends public resources, this news raises several worrying questions.
First of all, this intention shows that our politicians are still not aware of how a market economy works. The business cycle is an invariable part of any modern economy and economic crises are an inevitable consequence of it, especially in the conditions of constant interventions by the central bank. There has not been a serious economic crisis in Europe for over 10 years, which means that the next crisis will inevitably arrive sooner rather than later. Its depth will be a function of how long the ECB will maintain interest rates at non-market low levels. The longer this process continues, the more severe the next economic crisis will be.
At a time like the current one of high economic growth, when interest rates are at sufficiently low levels, and the high gross domestic product has been growing steadily for almost a decade, it is easy to spend money. Moreover, this economic boom masks the need for much-needed heavy structural reforms in a number of areas of the national economy, where billions flow every year. The problem here will occur when the inevitable crisis comes. Then, tax revenue collection will decrease and the contraction of GDP will not allow the state to continue maintaining this constant trend of extolling public spending. Then it will have to take a number of actions.
The first thing the state should do to avoid generating deficits is to resort to job cuts and salary cuts in the public sector. However, this will lead to political negatives that politicians usually avoid. The second and most logical thing that will happen is an attempt to increase the tax burden in order to maintain the pre-crisis levels of public spending. However, this is impossible in conditions of economic crises, because as a rule, tax collection falls, and increasing the tax burden on business precisely at this phase of the business cycle will only slow down the recovery process. Ultimately, budget deficits will be formed, which the state will have to finance with debt, and at high interest rates.
Secondly, it was not clear on what basis this money will be spent. An increase in wages is economically justified only when it corresponds to a proportional increase in labor productivity, otherwise it is non-market and always leads to the generation of imbalances in the long term. That is, in order for the increase in the administration's pay to be justified, all of us, the citizens, must have felt a tangible increase in the quality of the services that the administration provides us.
The political motivations behind this decision are logical and understandable. In 2019, at least European and local elections are coming up, and there is nothing more logical than for the ruling parties to want to strengthen support for them. In this particular case, however, there is no economic argumentation or justification. The unions and the government will certainly unite in promoting the thesis that public sector wages lag behind those in the private sector. However, this is an extremely superficial economic argument because it ignores the differences in labor productivity in the private and public sectors of our economy and, most importantly, that public sector wages come from all of us taxpayers and as such we have the right to know on what basis their level is increasing, while in the private sector entrepreneurs form the level of wages based on their profit.
The reasonable (right-wing) fiscal policy that the cabinet should be pursuing right now is that, when we have maintained high economic growth for so many years in a row, any budget surpluses that the state manages to realize should be set aside in the fiscal reserve so that our economy can be better prepared, more resilient and stable when the next economic crisis strikes.
The fact that we are currently generating a budget surplus is not an argument for spending it immediately, because it does not answer the difficult questions, such as on what basis this spending is carried out and what will happen when economic growth slows down and there are no longer enough resources to maintain the bloated public spending. Predicting exactly when the next economic crisis will occur is a difficult undertaking. That is why I cannot commit to predicting exactly when it will occur. The important point here, however, is to be completely aware that its occurrence is a matter of "when", not "if" and unfortunately, at least at the moment, it seems that those in power are not aware of this fact.
