Tag Archives: Public sector

Tax and intervention uncertainty killing the economy.

Everybody is talking about the impending largest tax increase in history due on January 1, 2011. In addition to the cost this imposes on the economy, there is the uncertainty this creates. The Giant Wakes writes:

The Bottom Line: Until the uncertainty surrounding the future Federal tax rates is resolved, it will remain yet another factor conspiring to keep businesses sitting in the economic sidelines, waiting for clear signals before committing capital to growth – and, the uncertainty had better be resolved in favor of sustaining the current rates rather than increasing them, if we hope to see an end to the ‘jobless recovery’ and any kind of broad-based improvement in consumer economic circumstances any time soon.

While The Giant Wakes may write about government intervention in a future post within his ten-part series called “Ten Tyrants of Uncertainty,” I thought I’ll jump ahead and add to the discussion.

Which is a bigger deterrent to economic activity: tax uncertainty or the uncertainty of government intervention? When government steps in to bail out one company at the expense of another, economic calculation is thrown out the window. And this does not just apply to corporations where our government may bail out GM thus hurting Ford or give billions to large banks while letting small banks fail. It also applies to each of us an individual. Those of us who are responsible, paying our mortgages each month or not buying a house knowing we cannot afford one, are now paying for those who irresponsibly bought more house than they could afford but whose mortgages have been “modified” by the government.

As a result, we now have a bipolar economy. We have those who have abandoned all risk taking, not knowing what the government will do. And we have those who take extreme risks, believing the government will bail them out if they fail. In the mean time, nobody is taking the reasonable calculated risks that are essential to a productive and profitable economy.

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Britain to fire 500,000 public sector employees. But not really.

As mentioned earlier, Britain is finally taking action to stave off a credit crisis and possible bankruptcy. Some are reporting that Britain will be firing 500,000 public sector employees.

For example, The Week reports:

David Cameron is laying off 500,000 government employees.

However, that will not be the case. As the Mail reports:

500,000 public sector jobs to go

1 in 10 public sector jobs to go as government gambles on private recovery

According to the story, this 10% reduction will take 4 or 5 years:

But they make clear that the Government has adopted the Office for Budget Responsibility’s forecast that 490,000 jobs in the public sector will go by 2014/15.

If the average public sector employee works for 40 years, 10 percent of them would retire within 4 years. In other words, the government will likely lay off very few people. Instead, the British government simply will not fill vacant positions.

This is great news, on the one hand, because the British are working to solve their financial problems and this job reduction it is quite easily achievable because it does not actually require firing many people. However, let us not be under the misapprehension that the British government is making a tough choice here. Do not believe the talk that half a million will be laid off. That is simply untrue.

Britain takes action to save country from bankruptcy. United States still has its head in the sand.

Marketwatch reports:

Britain will stick to its timetable for making the largest cuts in government spending in decades, the chancellor of the exchequer said Wednesday, vowing that the sweeping measures would bring the country “back from the brink” of bankruptcy.

Critics charge that the plan to cut spending by 83 billion pounds ($130.4 billion) between 2011 and 2015 threatens to send the economy back into recession, just as a recovery is losing steam.

Delivering the long-awaited, comprehensive spending review to parliament, Osborne said the austerity plan “is a hard road, but it leads to a better future.”

The plan will reduce spending across government departments by an average of 19% over four years and is expected to result in 490,000 public-sector job losses over that period.

There is no doubt about it; these cuts will be painful, but not nearly as painful as doing nothing and going bankrupt. Too many governments, political leaders, and populations have their heads in the sand. Action needs to be taken to stave off a credit crisis. Those countries that do so may feel some short-term pain, but they will be at a competitive advantage five or ten years from now.

Meanwhile, the US has not cut a dime from its budget. Instead, all the talk in the current Congress and the White House has been about more stimulus. Hopefully, this will change on November 2.