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11/12/2013 : Government wage bill: determinants, interactions and effects

Workshop organised by the Directorate-General for Economic and Financial Affairs of the European Commission

The Directorate-General for Economic and Financial Affairs (DG ECFIN) of the European Commission is organising a one-day workshop around public wage expenditure topics, on 11 December 2013 in Brussels.

A proper design of fiscal adjustment is an essential aspect of a successful approach to consolidation. Economists often advocate putting emphasis on expenditure restraint as part of a well-designed consolidation strategy. There is no optimal government size, but the common presumption is that both potential efficiency gains in spending and the opportunity cost of incremental taxation increase more than proportionately with the size of the public sector.

Faced with the necessity of consolidating public finances and strengthening budgetary positions, in a context of subdued economic growth, a number of EU Member States envisage to put under stricter control personnel expenditures. Public wages account for a sizable share of public expenditure, and a large consolidation is hard to achieve without efforts at restraining the wage bill. This is also indirectly reflected in the EU policy advice to Member States (e.g. Council recommendations, EC's Annual Growth Survey), which stresses the relevance of an appropriate composition of the fiscal retrenchment and indicates that expenditure-based fiscal consolidations, even though having a higher multiplier in the short term, are more lasting, more credible and preferable in the medium-to-long term. This is especially true if the expenditure cuts preserve growth-enhancing items.

It is also true that expenditure based consolidation, especially if relying on cuts in public wage bills, not only has direct effects on fiscal variables, but could also have indirect effects on the private sector.

On the whole, however, the available evidence is not conclusive and further research is required.

The workshop aims at covering the following main topics:

a) the determinants of public wage bills and the interaction with the private sector;

b) the effects of public wages cuts on:

  • successful consolidation results
  • the efficiency and quality of public services
  • productivity developments and competitiveness

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