After the recent election in Great Britain, in which Labour was defeated after 13 years in power and a Conservative-Liberal Democrat coalition took over, the new government faced a budget deficit bigger than ours. In less than three months, they came up with a plan to deal with it, including raising some taxes and cutting spending, with £3 of spending cuts for every £1 of increased taxes.***
But they did more than just that. In a list of good things the Conservative-Lib Dem coalition is doing, Andreas Whittam Smith put this one at number 3:
"The question is at last being asked whether it is fair that through their taxes, employers and employees in the private sector should have to fund retirement benefits for public sector workers that in the private sector they cannot afford to arrange for themselves – pensions that are inflation-linked, guaranteed and unfunded. To study this scandal, a commission to review the long-term affordability of public sector pensions has been established."
This is a question that needs to be asked here, too. The arguments this question will generate will be mean and nasty, but questions such as this have to be discussed because the present course of spending on public employee compensation, whether for salaries, benefits or pensions, even with the kind of minor change Illinois passed (i.e., changing pensions for employees who had not been hired), is unsustainable.
In the past, the benefits and pensions that government employees received were justified on the grounds that their salaries were less. It is unclear if that is true today.**** But in any case, if public employees continue to receive salary increases (when private workers are having their wages frozen or even cut), great medical benefits (when private employers are raising deductibles and employee contributions, if not cancelling health plans entirely), and inflation-indexed pensions based on their last several years earnings (which few outside the public sector even have any more), either taxes will go up – maybe a lot – or spending on things such as highways and schools and social programs will have to be cut – maybe a lot.
The old stand-by, raising taxes on the rich, won’t work because the rich don’t have enough money to pay for it all.***** The middle class will have to pay, too. And that means many of them will see their taxes increased to provide benefits and pensions they can only dream about.
The alternative to raising taxes is to cut back on schools or infrastructure spending or on benefits for the poor and sick. It will be interesting, for example, to see what middle class parents do when they realize that the reason for the cuts in their children’s school programs is the costs of pension and medical programs for the teachers.
If it does come to this, we could wind up having a particularly nasty form of the kind of populist/envy politics in which so many politicians have engaged in the last few years.
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* He probably didn't actually say it. See here.
** I did not include "cutting waste" as an option because that is pretty much baloney, and I am trying to be more honest than the average politician. Of course, given that I am from Illinois, that is not a very high standard.
*** "Radical Britain," The Economist, August 14, 2010 (print edition). While the new Conservative-Lib Dem coalition came up with their plan in less than three months, President Obama still hasn’t presented a detailed plan for dealing with our deficit. He’s waiting for the report of his National Commission on Fiscal Responsibility and Reform. Even though the commission was set up it in February, it won’t, somewhat conveniently, be reporting back until December; i.e., after the election.
**** Also, see "The Government Pay Boom," The Wall Street Journal, March 26, 2010.
***** And if you raise their taxes too much, they will just move.
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