Austerity and Government Debt scares are Red Herrings

The Nordic governments are full of politicians and professors who vow that Austerity is the only path to follow for the public sector.

It sounds convincing that these same men can tell their voters that taxes must not be increased and that the public sector must keep strict control over how money is spent. These are Red Herrings – have you ever heard any other story from their lips? 

The truth about public expenditure is actually very different – we have been spending too much on the wrong investments, and spending too much on operating costs…

Why does the government want to support large companies with huge grants. These “investments” made in the name of innovation or pragmatic “let’s keep them in Finland” arguments barely cover the bonuses and salaries made to top management. Most of these grants are being made to companies that make huge profits, and pay solid dividends as well as paying big benefits to their senior management. They do not need public support for innovations nor do they bring much in the way of growth and new employment. SME’s generate more growth and employ more people when they grow… Finland needs to spend more on education and support SME’s that grow and export. 

Keeping 6 relatively small (in international terms) pension companies is also nothing short of madness. They are investing public monies that are there for mainly future pensions. Their investments in real estate and loan, and their huge investments in bonds, which are replicated in every one of them are not needed, especially when bond returns are near to zero! They should be investing in much more in equities and, as stated in earlier columns, that type of investment policy and consolidation would result in higher returns and huge cost savings. All of their fund managers know that this is the truth. However, none will say anything because their remuneration is guaranteed for life.

Big investments in useful infrastructure can always be made especially when they have a life cycle of over 20, 30 or even 50 years. When government debt costs something near to zero percent, well below the rate of inflation, the choice is then to be brave and make those necessary investments like fast railways, and possibly Helsinki to Tallinn tunnel because they do make a difference and can be expected to have a positive return in both financial and climatic terms. This is clearly a better solution than selling government owned companies at low valuations. 

Selling natural monopolies like power transmission lines and digital transmission companies is absolute madness. Why sell a golden egg to private equity investors who increase prices and reap huge dividends from taxpayers. It is no wonder why investment bankers and right wing Trumpians bang the table for “smaller government” when they can fool politicians into selling the Crown Jewels at taxpayers’ expense.  

On the operating cost side, there are far too many small municipalities in Finland with over 300! Compared to Sweden and Denmark the correct number should be at the most 50% of the above number! The cost savings and the improvements in procurement cost efficiencies would be enormous for investments and operating costs. The talk about introducing a third level of government  called the ”the new counties” can only be regarded as a huge waste of money. There are no logical reasons for this extravagant proposal. If central government wants to control healthcare and social care costs then they can easily do that through a reformed (read reduced) number of municipalities that are then obliged to work together at a broader regional level.

The cost savings would be the following:

  1. Reduction of public support grants for big companies = €3 billion to €9 billion annually depending on who is counting!
  2. Consolidating the pension business = €3 billion to €5 billion annually.
  3. Not selling government-owned companies on the cheap = at leats €1 billion to € 2 billion over the next 10 years. 
  4. Reduction in numbers of regional government = €2 billion to €3 billion annually.

That leave quite a lot of cash for good investments and reduces operating costs, leaving tax payers much happier and bankers grumpy.

PS – a Red Herring is an attempt to redirect the argument to another issue to which the person doing the redirecting can better respond. A red herring is a deliberate diversion of attention with the intention of trying to abandon the original argument.

Photo: Wikipedia

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