Wednesday, March 3, 2010

The Worldwide Government Scramble for Cash

The Great Recession is seriously choking governments around the world. Since taxes are generally targeted based on a specific economic structure, tax revenues eventually collapse when a recession shifts that structure. Tax revenues based on property taxes collapse as property values decline instead of increase. Corporate tax revenues decline as the recession takes its toll on corporate profits.(Corporations structured their firms to participate in a period of money printing that is no longer.) Income tax revenues decline as people lose jobs in the shifting economy, and are further incentivized by "unemployment insurance" to not look for work aggressively.

The sheer size and rapidity of the shift takes governments off guard. Those governments who play it close to the edge, and most do, face budget crises so dramatic that it forces government officials to do something they would never do if they didn't have a financial crisis wrapped around their neck, that is, shrink the size of government in an attempt to preserve cash.

Admittedly, this scenario only plays out for governments who don't have the keys to the money printing presses, but this list has grown since the formation of the European Union. Countries, such as, Portugal, Italy Greece and Spain, now join cities and states that are forced to cut budgets in a crazed scramble to halt the outflow of cash. And, when they think they can get away with it, raises taxes based on the new structure of the economy.

Greece this week, for example, is slashing more than 60% of one month's pay for public-sector workers by cutting 30% of their current Christmas, Easter and holiday bonuses. It is also will also raise the sales tax by 2%

On a local government level, Gavin Newsom the Mayor of San Francisco has announced that he will cut some jobs, and reduce the workweek for 15,000 employees to battle a budget crisis. He is reducing the work week from 40 hours to 37.5, which is essentially a 6.25% wage cut. The move will save $50 million for the general fund. The budget shortfall for the next fiscal year, which begins on July 1 is expected to be $522 million.

Hospital employees and tax collectors are not part of the planned reduction.

In Los Angeles, Mayor Antonio Villaraigosa has finalized the first 542 positions slated for elimination. The city council has approved layoffs of up to 4,000.

The City of Angels has a $212-million budget shortfall this fiscal year and next year's gap is now calculated at $485-million.

Only the money printers seem to have no fear of growing deficits. President Obama has not cut back the federal government. Indeed, he continues to issue proposal after proposal that will expand it, from banking "reform" to a healthcare project that will surely add billions to the deficit in years to come. Without the backstop of the Federal Reserve, Obama would be nowhere near as comfortable about adding to spending. This in other words is the key reason to End the Fed, it feeds the growth of the government beast.

1 comment:

  1. Two accounting changes will exacerbate this dire situation for state and local governments. One involves accounting for retiree health insurance, the other is underfunded pensions.

    It's similar to "mark to market" or fair value accounting in a time of imploding asset prices. I doubt Congress will bully wimpy accountants over this issue.