2010 April 03 Saturday
Lithuanian Cut Government Spending 9%

Necessity is a mother. Lithuania, like Greece, presages America's future.

Faced with rising deficits that threatened to bankrupt the country, Lithuania cut public spending by 30 percent — including slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. Even the prime minister, Andrius Kubilius, took a pay cut of 45 percent.

And the government didn’t stop there. It raised taxes on a wide variety of goods, like pharmaceutical products and alcohol. Corporate taxes rose to 20 percent, from 15 percent. The value-added tax rose to 21 percent, from 18 percent.

The net effect on this country’s finances was a savings equal to 9 percent of gross domestic product, the second-largest fiscal adjustment in a developed economy, after Latvia’s, since the credit crisis began.

We'll know when Congress is serious about cutting spending when wages and benefits for federal workers cease being untouchable. That'll happen when US Treasury bond yields shoot up high, causing a liquidity crisis that forces massive cuts in outlays.

When the US sovereign debt crisis hits with full force federal worker wages and benefits are going to get targeted for big cuts. As things now stand US federal workers make more than their private sector counterparts in most occupations.

Overall, federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector, according to Bureau of Labor Statistics data. The average pay for the same mix of jobs in the private sector was $60,046 in 2008, the most recent data available.

The biggest difference comes from richer benefits for federal workers. Medical and retirement are much richer for the feds.

These salary figures do not include the value of health, pension and other benefits, which averaged $40,785 per federal employee in 2008 vs. $9,882 per private worker, according to the Bureau of Economic Analysis.

America's demographics trends (less skilled, older), unfunded entitlements liabilities, reckless government from both political parties, and Peak Oil all make a fiscal train wreck inevitable. We can study events in Lithuania, Greece, Argentina, and other countries that have gone thru sovereign debt crises to see what's in store. Plan accordingly.

One of the big political conflicts of the next 10 years is going to be over how much of the response to the coming sovereign debt crisis will be dealt with by savage spending cuts versus brutal tax rises. Either way, living standards will decline when we are forced to live within our means.

Update: The same pattern of more rapidly rising public sector pay holds for Britain too. Well, the British are headed for their own sovereign debt crisis. So the public sector's wages and benefits are headed for big cuts there too.

The earnings of people employed by the state grew by an average of 2.3% a year between 2001 and 2005, compared with growth of around 1.5% for those employed by private firms.

But workers in the public sector saw their pay increase at nearly twice the rate as their private sector counterparts once pension benefits were taken into account, according to the Institute for Fiscal Studies (IFS).

Share |      By Randall Parker at 2010 April 03 10:53 PM  Economics Sovereign Crises


Comments
Edward Thwaite said at April 5, 2010 8:52 AM:

"... living standards will decline when we are forced to live within our means." When the financial crunch really hits Uncle Sam, then "we" will find out how truly un-"we"-like American society has become. Hispanic blue-collar workers and Asian white-collar workers will rebel against supporting the idiot white baby boomers (senile and financial insecure) as well as the wildly irresponsible black underclass (bad attitude and worse work ethic). The Lord might have mercy, but will Uncle Sam's creditors have mercy?

gig said at April 6, 2010 11:44 AM:

a couple points about Lithuania

- the Soviets didn´t create as much entitlements as Social-Democrats in the West, if only because they were milking a much more disfunctional economy. Social-democrats always start with extremely cheap programs in highly productive capitalistic economies. The Soviets couldn´t milk as much from a Gosplan engineered economy. Also, any entitlement created by the Soviets was wiped out by the fall of the USSR.

- It helps a lot to have a high-IQ, homogeneous population, when doing fiscal adjustment, since it won´t involve racial redistribution


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