07.31.2009 0

A Lesson from Across the Pond

  • On: 08/27/2009 09:40:01
  • In: Fiscal Responsibility
  • By Howard Rich

    As states like California, Illinois and New Jersey struggle to make up for steep multi-billion dollar budget deficits while they totter on the brink of insolvency, there is one option for reducing those shortfalls that is making real headway across the Atlantic Ocean.

    It all revolves around cutting the public sector. It’s time to try it here.

    Ireland is faced with a €20 billion deficit and borrowing €400 million a week just to keep afloat. Colm McCarthy, the chairman of An Bord Snip Nua—a cost-cutting bureau in Ireland—knows the stakes. And he sees no way around cutting public sector pay by some €5.3 billion. Government officials agree. So far, the left-of-center government refuses to rule anything out in the Bord Snip report.

    Writes The Sunday Times on July 19th, “Ireland is like a household that has been living beyond its means and now finds itself deep in hock to the bank. Unless we show a willingness to reduce our spending, [international] lending may dry up, forcing us into the arms of the European Central Bank which will have to mount an IMF-style rescue to prevent a euro currency crisis.”

    Ireland is not alone. Poland just announced a cut of 12,000 government employees. No silly furloughs or dodgy accounting tricks. A straight reduction in the number of public sector workers. And the government warns that if revenues do not increase, further reductions will be forthcoming. Other nations in Europe are actively considering similar or even deeper cuts.

    The basic problems Ireland faces are quite similar to those in California, New York and other states in the U.S.: Public sector workers make far more than their private sector counterpart.

    An October 2007 survey from Ireland’s Central Statistics Office showed that the average hourly earnings in the public sector were far greater than in the private sector. Average earnings per hour in the public sector were €26.67 compared with €18.07 per hour in the private sector. Public sector wages are 48% higher.

    And how do California, Illinois and others match up?

    According to the Bureau of Labor Statistics’ recently published study for 2007, in California, which is still trying to climb out of its oppressive $26 billion deficit, average annual income for state employees was $56,777 versus $49,935 for the private sector, a 14 percent gap. In Illinois, a similar story emerges: $53,925 for state workers, and $48,006 for the private sector, an 11 percent split. New Jersey: $57,845 average state salary, $53,590 for private sector workers, at an 8 percent difference. And these differences don’t take into account the excessive fringe benefits enjoyed by public sector workers. The bottom-line is that we pay the public sector more, in some cases far more, than corresponding workers in private business.

    Nationally, the story is even worse. Federal workers made on average $64,871 in 2007, with private sector workers making a meager $44,362, so public sector wages in the federal system are 46% higher.

    If California, and other spendthrift state governments ever hope to emerge in the black, they must now implement what some may consider draconian fiscal measures. Cutting public sector pay makes the most sense. In California, for example, if workers received a 12.1 percent pay cut, leveling the playing field with the private sector, the state would save $3.1 billion.

    Cutting the total workforce down by 10 percent is a real move that saves $5.4 billion annually and many billions more over time. Similar approaches would save taxpayers annually $1.3 billion in Illinois and New Jersey.

    The fact is, the Irish are on to something. By facing the reality of their situation head-on and acting in a responsible manner, they are far more likely to weather the financial storm than are the compulsive spenders in the US. It is high time we embrace the pluck of the Irish here.

    The author is Chairman of Americans for Limited Government and Liberty Features Syndicated writer.


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