Wednesday, December 21, 2011

The money trap

Today, we can read in the newspaper (hat tip: Correio de Manha) that the savings in 2012 on public servant salaries and pensions is 4.26 billion euros.  However the loss in income on taxes and social security means the liquid savings are only nearly half:  2.57 billion euros.

Savings: 3 billion, considering loss of taxes and social security: 1.62 billion

Savings: 1.26 billion, considering loss of taxes and social security: 0.95 billion

The savings are mainly due to cutting the 13th and the 14th salaries.

I doubt all lost taxes are included in the above.  What about VAT?  Or people buying a car?

The problem has been created as taxes taken all together already are extremely high.

The problem of firing existing public employees or retiring existing public employees is similar.  There are no real savings now.  They will instead of working, do nothing (which I assume is less than now).  On top of that the cost of the state in the short to medium term is the same (or more) due to penalties, unemployment benefits and pensions.

When you reduce money available to people they will obviously spend less. Hence, less companies will be created, some existing companies and businesses will fail, some families will go bankrupt etc.  The net income of the state due to these measures may in fact be close to neutral or even negative.  Due to the current state of affairs - with a generalized financial crisis, tight or no credit, the tightening or stop of spending by the public and private sector, zero incentives for companies, zero help to companies, added costs in the form of taxes to both companies and citizens, the maintained and even tightening bureaucratic barriers - this may in fact be the infamous drop, that will start an avalanche of misery.  Both measured in financial and human costs.

The only viable solution is to make the private enterprises more profitable and larger combined with creating more companies.   These companies need to produce and export.  Because we all live off their products.

We are still awaiting structural reforms.  Don't hold your breath.

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