It’s unlikely that we have seen the last of the public sector strikes that afflicted Greece this week, as the troubled country attempts rapidly to reduce its budget deficit.
Public sector workers were so enraged by the Greek government’s plans to curtail public spending that they held two days of industrial action and rallies in the capital and beyond. Flights were grounded, schools closed and hospitals operated an emergency-only service.
Of course, Greece is not alone in seeking a drastic deficit reduction. Portugal, Ireland, Greece and Spain – known as the eurozone ‘Pigs’ in financial circles – all have budget deficits in excess of 9% and are aiming to get below 3% within three or four years.
At home, comparisons were understandably made with the UK. Simon Johnson, the former chief economist of the International Monetary Fund, was one who suggested that the UK should be considered in the same category as Greece and Spain.
There is some sense in this. Britain has a budget deficit expected to be 12.6% for this financial year and a debt to gross domestic product ratio of almost 70%. Without significant and speedy deficit reduction, it is feared that we will lose our vital triple-A credit rating.
And yet there are reasons to suggest a more finessed approach. Most importantly, we have some choice. Eurozone countries are obliged to keep budget deficits below 3%. As the UK is not part of the euro, we do not have to abide by these rules.
The government has, of course, promised to halve the deficit within four years, while the Tories have suggested that they would cut sooner and deeper. However, there are dangers along the way.
Control of the deficit is clearly a priority, but cutting back too quickly could imperil the economic recovery and herald a double-dip recession. Social unrest, if not on the Greek scale, might easily result.
This point was made by professor Joseph Stiglitz, the former World Bank chief economist, speaking at CIPFA’s World-Class Performance Symposium this week. Stiglitz warned that ‘mindless’ deficit reduction would lead to greater and longer-lasting national debt.
It’s a difficult balance to maintain. With growth likely to reach only 1% this year, according to Ernst & Young’s Item Club, the wrong decision could strangle the recovery.
Whoever is chancellor come May 7 will certainly need a canny approach to avoid making a pig’s ear of both public services and the economy.
Mike Thatcher is the editor of Public Finance
