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The effect of public budget cuts in EU countries
欧盟国家公共预算削减的影响
大衰退后，许多国家都留下了对赤字和不断增长的国债的忧虑。在大多数国家，这是导致经济衰退的新阶段。没有事实表明，当公共债务或赤字相对过高会导致经济规模的变化。在危机发生之前大家一致认为，富裕国家可以轻松拥有自己的国内生产总值的60％的债务。但是，当市场确实对政府财政清廉失去了信心时候，危机很快出现，这将迫使政府做出一些痛苦的决定。
在最近一本关于主权债务名为“This Time is Different”的书，马里兰州大学的卡门•莱因哈特和哈佛大学的肯尼斯•罗格夫认为：“这些证据未能够支持国家应该增加其债务的这一观点。”
Introduction:
After the Great Recession, many countries have left with deficit and increasing anxieties about their growing national debts. In most of the countries this was leading to the new phase of strictness of economy. There is no rule which suggest that when public debts or deficits are too high relative to an economy size. Prior to the crisis it was agreed that the rich countries could easily have the debts of 60% of their GDP. But when the markets do lose confidence in a government fiscal rectitude, a crisis can rise very quickly, forcing governments to make some painful decisions.
In a recent book on sovereign debt, “This Time is Different”, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard conclude that “the evidence offers little support for the view that countries simply grow out of their debts.”
Background:
European Economy is in the deepest recession since 1930’s with a real GDP speculated to shrink by 4% in 2009, and it is the sharpest reduction in the history of EU. Although economy shows some signs of improvement and recovery but this signs are uncertain and delicate.
In the early ages of the crises it manifested itself as a acute liquidity shortage among the financial institution as they faced a stiffer market conditions for placing their typically short term debts. In this time there were increasing concerns over the solvency of Financial Institutions. The systematic collapse was deemed doutful.that perception was changed when a one of the major US bank defaulted in Sep, 2008(Lehman Brothers).
According to the data published by the Euro stat on 20 October, the Current account deficits of EU countries with the non- EU is €37.1 billion in the second quarter of the 2010, as compared to the deficits of €42.1 billion in the second quarter of the 2009 and €31.8 billion in the first quarter of 2010.Compared with the second quarter of 2009, the deficits of the goods account (-€29.9 bn compared with -€14.9 bn) and the current transfers account (-€14.2 bn compared with -€11.9 bn) both increased. The surplus of the services account rose (+€19.3 bn compared with +€16.7 bn), while the deficit of the income account declined (-€12.4 bn compared with -€32.1 bn).
ROOT CAUSES OF THE CRISIS:
The Financial crises badly hit the EU economy from the autumn of 2008 to onward. Essentially there are three main causes.
2.1 Financial Syastem and its lacking:
Initially the losses mostly started from US, But it effects the Europe largely, notably in the UK and the euro area, than in the US. According to the report these losses may be expected to produce a large reduction in the economic activity. Moreover, in the process of deleveraging, banks drastically reduced their exposure to emerging markets, closing credit lines. Hence the crisis snowballed further to the emerging European economies whose financial system had been affected initially.
2.2 Confidence and wealth effect on demand:
As Lending standards goes down and become stiffened, household suffered declines in their wealth, in the wake of drops in asset prices (stocks and housing in particular), saving increased and demand for consumer durables (notably cars) and residential investment plummeted. This was amplified by the inventory cycle, with involuntary stock building prompting further production cuts in manufacturing. All this had an adverse feedback effect onto financial markets.
2.3 Global Trade:
In the final quarter of 2008, business investment and consumer durables which both are strongly credit and trade dependent had plummeted. This trade squeeze was deeper than might be expected on the basis of historical relationships, the unavailability of trade finance and a faster impact of activity on trade as a result of globalisation and the prevalence of global supply chains.
Financial crisis has been affecting the EU countries:
The extent to which the financial system crisis has been affecting the EU individual members of the countries, Strongly depends on the their initial condition and the associated vulnerability.
The Commission forecast by country
Source: European Commission Spring Forecast
Impacts of these crises can be categorized into three groups.
3.1. IMPACT ON LABOUR MARKET AND EMPLOYMENT:
In the 2nd half of 2008, Labour Market of EU countries started to weaken, deteriorating further in the course of 2009.Increased internal flexibility coupled with nominal wage concession in return for the employment stability in some of the firms and industries appears to have prevented, though perhaps only delayed, more significant labour shedding so far.
Even so, the EU unemployment rate has increased by more than 2 percent and they are expecting to have increased rate in the un-employment. The employment adjustment to the decline in economic activity is as yet far from complete, and more pronounced labour-shedding will occur as labour hoarding gradually unwinds. According to the European commission report 2009 there is a reduction in the employment by 2 and ½% in this year and it will be further reduced in the 2010 by 1 and ½%.The unemployment rate is close to 11% in the EU by 2010.and it is expected to be 11 and ½% in the euro zone by 2010.
Unemployment rates in the European Union
Source commission 2009.
3.2. IMPACT ON BUDGETARY POSITIONS:
The fiscal cost of the financial crisis is very huge. A rapid decline in the public budget is now taking into account. The decline in the potential growth due to the crisis may add further pressure on the public finance, and dependent liabilities related to the financial rescues and interventions in other areas add further sustainability risk. Part of the improvement of fiscal positions in recent years was associated inter alia with growth of tax rich activity in housing and construction markets
EU Austerity drive country by country
Due to this recession governments of all the EU countries have decided to take down their budget and reduce the public benefits. A new austerity drive has been sweeping across Europe, as governments struggle to trim huge budget deficits and the 16-nation euro zone races to reassure sceptical markets.
EU Finance Minister has agreed on the rules that will automatically punish member states which break the budgetary rules. With the EU expecting to have maximum budget deficit of 3% of GDP by the financial year 2014-15.
4.1. IRISH REPUBLIC
On 21,Nov Irish government asked for a multi-billion euro rescue package from the EU and IMF, to take care of banking and budget crisis. It is expected to be worth about 85-billion euro. It is the 2nd biggest euro zone bailout in the last six months after the Greece.UK and Sweden have also assured to lend bilaterally to help shore up its economy. In September cost of bailing out the country’s stricken bank had risen to 45-billion euro’s. And a budget deficit is almost 32% of GDP. They indented to bring that down to 2.9% by the end of 2015. The Government has a aim to bring down the budget deficit to 6-billion by the end of 2011.Government spending has been cut down to 4-billion euro. All government servants pay will be reduced to 5%. 1.9 bn euro to raise from the taxes, a one euro cut in the minimum wage to 7.65 euro’s and VAT has gone up to 22% in 2012 and 24%in 2014.Child benefits also cut down to 16 euro’s a month.
4.2 UNITED KINGDOM:
Britain government has announced the biggest cut in state spending since World War 2. As said by the Conservative-Liberal Democrat coalition.
Chancellor Osborne told the parliament that 490,000 public sector jobs will be cut because country is running out of its resources and money. Most of the department face the budget cut of 19% on average while 8% cut in the defence budget is announced. Retirement age is rised from 65-66 from 2020. Dave Prentiss ‘Secretary of Trade’ there will be no cuts in the industrial sector. While the Labour party said the government is using the ‘slash burn policy’. despite of having such economic strictness UK is willing to lend £7bn to the IR.#p#分页标题#e#
4.3. France:
On other hand due to this hard time France has also announced 45bn Euro cut in its spending over the next three years. Some of the money will be saved through closing the loose tax loopholes. They are also intended to rise the retirement age from 60-62 and full state pension from 65-67. Highest earner will also need to pay 1% extra tax.
4.4 Greece:
The Greece government is also doing its level to cop up with the current crisis. cutting in its spending and boosting the revenue through tax in return for a 110bn Euro from the EU and IMF.
Greece has received 20bn Euro in May and expecting to have 9bn Euro in Sep. the aim of the govt. To slash the budget deficit from 13.6% of GDP. The country is making it possible to get the 100% tax from the payables. The retirement age is set to rise from61.4 to 63.6.freeze Public sector salary and stop the recruitment. They have also increased the VAT by 4%.
4.5 SPAIN:
The Spanish government has also approved the budget and cut down its spending by 8% for 2011 which includes tax increase for the rich. Spain has also assured that it will reduce its budget deficit to 6% of GDP. Workers have had their pay cut by 5%.tax on Tobacco has increased to 28%they are also planning to sell their national agencies.A tax rise of 1% to all who is earning more than 12,000 Euros. End of baby Cheque scheme for he mothers. Stop paying 426 Euros to un-employed people.
4.6 ITALY:
Like other countries Italy has also the same plans to cop up with the current financial crises, they introduced 24bn Euros budget for the year 2011-2012.
The cuts amount to about 1.6% of Italian GDP. Italy is freezing the public sector pay and stops the new recruitment. Pensions and spending are also being reduced. Public welfare work is stopped. Replacing only one employee for every five who leave for the next three years.10% deduction in the pay for the high earners. Retirement will be delayed for the six months.
4.7. Germany
German plans to cut the budget deficit to a record 80bn Euro’s, Total deficit in 2009 was3.1% of GDP. No more extra support for the parents, 10,000 cuts in public sector jobs. Higher taxes on the nuclear energy. The rebuilding of the baroque Stadtschlos palace in the heart of Berlin will also be postponed.
Possible Impacts of the policies;
People who are most effected by the Financial crisis are those which are low incomes, which may be sub-divided into the Elderly People, young un-employed, medium earners and disabled people. Or who have the young children’s. Following are the possible impacts on the life of these people.
5.1 Falling Standards of Living;
Those on low incomes, which could include those reliant on welfare, pensions or fixed incomes and also those that are relatively well-paid but unable to cope with rising costs as they are already, in simple terms, ‘mortgaged to the hilt.’
5.2 Relying on Welfare ;
Poor and un- employed people who don’t have enough resource are heavily relied on the government benefits, spend most of their money on the food and basic necessities of life. If a government stops their aiding it would be very difficult for them to survive during these tough economic conditions.
5.3 Un-employment;
As most of the governments have the plan to cut the jobs as they are not in the position to pay the salaries to the employees then it would be very difficult for the people to survive in this economic tough situation having no jobs. as the prices of goods and properties are rising how they will cop up with the situation?
5.4 Financial Hardship:
At maximum risk are those on low incomes and/or without possessions to have a loan of against. However, to this can be added those that under normal situation would expect to ‘get by’ but who through changed circumstances, such as unemployment, may suddenly find themselves in the ‘at risk’ group. This may include first time buyers and with those with no or little savings.
5.5 More Family Break Up:
Those on low incomes cannot survive in this society due to the high pricing and taxes so it would be really difficult for them to run their families successfully they end up on the break up. In the absence of govt aid its very difficult for them to bear the expenses of health care. Result will be poor health.
Due to family break up crime rate start to rise in the society is again a big virus for the
Society.
The Social Impact of a Recession – Possible Winners and Probable Losers
Winners
There is a school of thought – and evidence - that questions the extent to which people are better off during times of strong economic growth and suggests that in some respects recessions are actually a blessing:
People drink less, smokeless and eat healthier food, cooking at home more and eschewing expensive fatty foods.
There is growing demand for public allotments, with more people not just wanting to grow their own food but to sell surplus produce.
More people enrol in higher education, particularly young people who feel it will be advantageous to prolong their education. Libraries report an increase in lending.
People travel less, either as an economy measure or because they are no longer commuting; the air is cleaner and the number of road traffic accidents reduces.
People are less likely to neglect their families, taking more time to visit elderly relatives and looking after children themselves rather than enrolling them in after-school activities etc.
People throw away less food and replace consumer goods, such as televisions, less often. Levels of non-recyclable household waste tend to fall.
Prices for necessities tend to level out and then fall. People buy and sell more second hand goods.
More people downsize and reduce not only their mortgage but their outgoings in general, giving them the means to do more of the things they want to as opposed to the things they have to. Statistics show that, generally, levels of personal contentment do not fall during a recession.
People (and businesses) are encouraged to think and act in more environmentally friendly and sustainable ways, mostly in terms of wasting less food and water, using cars with better fuel consumption and becoming more energy efficient .
Losers
Many more people lose their homes and their livelihoods. Mortgage repossessions are expected to rise 50% in 20086 and it has been estimated that 305 people are being declared bankrupt or insolvent every day.
More people indulge in gambling during a recession and bookmakers admit their core customers tend to consist largely of those on low incomes or already in financial trouble.
Minority parties, particularly those at the extremes of left and right, expect to do well during a recession, benefiting from disillusionment with the traditional order
The Economic Impact of a Recession – Possible Winners and Probable Losers
Winners
It has been observed that a downturn has advantageous financial side-effects, both in general terms and in relation to individual sectors of the economy.
It speeds up the business Evolution Process
A slowdown in the property market opens up opportunities for first-time buyers.
Businesses are more likely to think in terms of greater efficiency.
Losers
Manufacturing: The manufacturing sector has declined at a record rate as consumers rein in their spending. Construction companies have been badly hit by deteriorating economic conditions, particularly house builders.
Services: Some analysts suggest it will be the service sector (e.g. retail, leisure and financial services) that will suffer the most, noting that it has already suffered its biggest fall in output since 1996. The service sector constitutes 75% of the total economy.
Many of the companies most likely to suffer in a recession are those in the middle of their sector, where the sector itself does okay but consumers shift around within it, Many of the companies most likely to suffer in a recession are those in the middle of their sector, where the sector itself does okay but consumers shift around within it:
Designer stores survive because their clients, the wealthy, are insulated against recession. Most bargain stores survive as many consumers trade down. Those that suffer are the likes of M&S and Debenhams as consumers trade down or hold fire.#p#分页标题#e#
The same is true in the hotel and restaurant industries, where it is three and four star businesses that are reporting the most significant downturns.
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