The Annual Report on Public Finances in EMU was presented in Brussels last week. The reduction of state benefits and implicitly even pay cuts would form part of the programme, if the EU Commission had its way. Even though this would lead - according to its calculations - to weaker growth and higher unemployment in the coming years, it would nevertheless be without alternative. The concrete advice goes in the direction of consolidation and above all the reduction of expenditure - in particular personnel and material costs as well as transfers. In addition, it is recommended to implement structural reforms for an increase in productivity and investment as well as in the pension, health, social and educational sector to achieve long-term financial sustainability.

Extent and sources of the deficit

The report gives a good overview of the impact of the crisis and a first assessment of the countermeasures for stabilising the financial sector and for boosting the economy respectively. It shows impressively how significant the impact was the crisis had on public households. Today, the budget deficit of the Eurozone increases to forecast 6.6 % of the GDP (only 0.6 % in 2007); its debt has grown to 84.7 % (after 66 % in 2007). Meanwhile, proceedings because of excessive deficit according to the Stability and Growth Pact were initiated in all countries of the Eurozone. Primarily, the increase of the deficits is a result of higher social expenditure, which became necessary to absorb the consequences of the crisis and decreasing income due to the drop in direct taxes. Apart from that, the report outlines the forthcoming consolidation steps, as they can be found in the stability programmes of the Member States. About three quarters of the consolidation should be achieved by reducing public expenditure. Overall, the deficit in the Eurozone shall be reduced to 3.9 % in 2012. This would be equivalent to a withdrawal of the aggregated demand of several billion Euros, which will inevitably have an impact on the already weak growth and high unemployment. With regard to the Austrian budget consolidation, the Commission postpones its assessment until concrete measures have been taken.

The Chamber of Labour (AK) and the trade unions do strongly warn against an overhasty austerity programme. Although a consolidation is necessary in the medium term, it must not be undertaken unconditionally and has to take other economic targets, in particular employment or distribution, into account. The fact that for way beyond 20 million unemployed in the European year for combating poverty and social exclusion hard social cuts are not only decided across Europe, but also actively supported by the European Commission - in contrast to higher taxation for the wealthy - is of almost unrivalled cynicism. A recently published AK study shows that cutting public expenditure before the economy has fully recovered does also continue to slow down growth and employment - as can be found in the analysis part of the Commission publication itself. What would be important now is opening up new sources of income, which would have a positive impact on society, such as the taxation of wealth or the abolition of tax privileges for private foundations and multinational concerns. The economic analyses in the third part of the Commission report, however, demonstrate once more that in the short term such measures are actually the gentlest type of consolidation.

Further information:

Press release of the Commission on the Report on Public Finances 2010

AK study: Alternative strategies of budget consolidation (available only in German)