Spain Cuts Civil Servant Pay, U.S. Raises It: Who's Right?

Is Spain showing the world the right way to get its fiscal house in order? If so, should the U.S. follow suit? The answer to these questions highlights some big differences in political philosophy between the two countries. Within the eurozone, Spain is more like a U.S. state than a country, in that it has to at least try to balance its budget. By contrast, since 2001 the U.S. has decided that the best way to run things is to cut taxes, boost government spending, and borrow money to make up the difference.

According to The New York Times, Spain is taking steps to reduce the ratio of its budget deficit to its gross domestic product from 11.2% in 2009 to 6% in 2011. These steps include cutting public-sector employee salaries by 5% in 2010 while keeping them flat in 2011; Spanish lawmakers are taking a 15% pay cut in 2010; Spain is reversing itself on a plan to increase pensions in 2011; and it's dropping a $3,175 subsidy for new parents. Ouch!

The U.S. has pursued a different path. Between 2000 and 2009, the U.S. boosted its national debt from $3.4 trillion to $12 trillion while it went from an annual budget surplus of $236 billion to a deficit of $1 trillion as it cut $1.3 trillion in taxes -- and 32.6% of those tax cuts went to the richest 1%. Meanwhile, it got itself into two costly wars.

More recently, the U.S. has decided that the best way out of its financial difficulties would be to boost government spending. To that end, in December 2009, the U.S. boosted federal worker pay by 2% in 2010. According to Stars and Stripes, the 2% pay increase includes "a guaranteed 1.5% pay raise for all government workers, plus locality pay adjustments which average out to another 0.5%. It's the lowest pay boost for federal employees since 1988."

So who's right, Spain or the U.S.?

Split the Difference: They're Both Right

Turns out, both. Spain is correctly taking the initiative now to get its fiscal house in order so that later, it won't need to take even more extreme austerity measures such as those that Greece is preparing to suffer through. The Spanish government's moves are no doubt unpopular, but they will be less unpopular than what that nation would be required to do if it postponed dealing with its deficits.

One the other hand, the U.S. was right to choose to temporarily boost its deficit and unleash a flood of liquidity in order to fend off the Great Recession. As evidenced by the March and April jobs reports, and the rise in U.S. GDP over the last few quarters, this approach is working in an economy which depends on consumer spending for 70% of its economic growth.

Nevertheless, as I suggested in a DailyFinance column on May 2, in the medium term the U.S. will need to follow Spain's example and get its fiscal house in order if it expects to enjoy another 1990s-style economic boom like the one Bill Clinton led the nation through, thanks to his moves to balance the budget and encourage high-tech innovation.