Pages

Thursday, April 08, 2010

Austerity Happens

... whether you want it to or not.

Greek bonds are still getting hammered. The Euros have stroked their chins in deep thought, shaken hands, nodded heads and made agreements with the IMF. The Greeks have mumbled promises about some budget cuts that might be made some time in the future if they really, really need to do so. Greek bonds are still getting hammered.

In getting my Greek Geek on this morning, I came across this little bit of gloom regarding the latest victim on the altar of compassion.
The Greek general government had total expenditures of 44% of GDP in 2008, and tax revenues of 41% of GDP. If the 13% adjustment effort were to come entirely from expenditures, this would imply a cut in public spending of 30% of GDP. Conversely, if all the adjustment were to come from taxes, it would require a tax hike of a similar scale. Given the degree of corruption and the inadequacy of the Greek tax collection system, there is no way that taxation could take the lion share of this adjustment.
The math is complicated, so let me clarify it for you. Greece is facing the need for budget cuts of about 25% of their government spending. In the US, this would equate to $850B in budget cuts at the Federal level to prevent default, bank failures, a run on the currency and the advent of carteneros. In Greece, they have practically no defense spending at all, so all of these cuts will have to come from public sector pay and social services.

Compassion kills.

No comments:

Post a Comment