Unsustainable? Welfare, Taxation and Bureaucracy

Angela Merkel used to say that “the European Union is c5% of the world’s population, c25% of its GDP and c50% of global welfare spending”:

The real data is more concerning.

The European Union is:

7.2% of the World Population.
23.8% of the World’s GDP.
58% of the World’s Welfare Spending.

Something has to give.

The EU average tax burden on workers is 44.9%. The average worker in the EU spends half a year working for the tax man.

Taxation accounts for 41% of the euro area GDP.

Ease of doing business remains below the leading economies of the world.

Bureaucracy is asphyxiating. The EU approves on average 80 directives, 1200 regulations and 700 decisions per year.

The main EU economies remain significantly below the leaders in economic freedom.

At the same time, despite massive tax burden and constant confiscation of wealth, the EU’s average debt to GDP is 90%. Continuously making science fiction estimates of tax evasion and calling to tax the rich as a mirage, has led to unsustainable levels of government burden on the real economy and hinders investment and capital investment as policies are increasingly aimed at taxing the productive to subsidize the unproductive.

Using unrealistic estimates of tax revenues made by politicians -that are always missed- for very real expenditures -which are consistently above budget- has made the EU miss its debt reduction expectations.

The cost of hiper-regulation and excessive taxes to job creation, investment and innovation are evident. The EU has an unemployment rate that almost doubles the leading economic peers, and taxation hinders the growth of SMEs (small and medium enterprises), which shows a ratio of development to large companies that is half the same ratio in the US.

The EU has many positive things, as I explained here. But we cannot let bureaucracy and confiscatory taxation to take over a worthy project. Because ignoring those risks, we would make the EU implode.

Unless the EU politicians change their mindset of a model built on massive taxation and bureaucracy and start putting at the forefront of policy cutting taxes, slashing red tape, more open business, more economic freedom, focusing on job creation and attraction of capital, the welfare state will implode.

The EU’s welfare state can only be protected defending growth, investment, and job creation. However, it will likely be destroyed by the same ones that say they defend “the public sector”. By making it unsustainable.

Daniel Lacalle is Chief Economist at Tressis SV, has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)

Images courtesy Lisa, 2012 at Washington Post Writers Group

(Data Eurostat, World Bank, Daily Telegraph)

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

3 thoughts on “Unsustainable? Welfare, Taxation and Bureaucracy

  1. But why EU politicians are able to keep this working? Because EU citizens have become lazy and they do not supervise EU politicians budget management, why don’t we ask for better taxes management? Why they don’t punish much more corruption or bad managements?

    We have a good example here in Spain, why people is not going into the street to riot about IRPF reduction? You say this morning in el economist that money price will rise this year. We are not able to pay current debt interest and we reduce taxes when debt cost is about to rise next year? It will mean that we are reducing taxes to increase them next year. Why are paying almost the same amount of debt cost than half what Health service cost annually?

    Welfare state could be as good as private service, but is should be managed as the most efficient enterprise, citizens must ask this to politicians and involve on management supervision, and with the same quality standard and if this happens I’m pretty sure economic growth in EU area will outpace other regions. If people in Spain devote the same time to make sure taxes are spend properly as they expect reading Marca or Hola, I’m pretty sure welfare state will be cheaper than any other option and source for growth since with lower salaries we will have same standard of a living due to the positive externalities welfare state will generate.

  2. Does the writer think that $1 Trillion defense spending financed by deficit spending is the sign of a healthy economy? A healthy population and a well functioning infrastructure is good for the economy and benefits enterprise, as it removes this burden from them. So all the Thatcher/Milton Friedman sound bites sound pretty threadbare in time of austerity and their clichés only appeal to right wing nuts, who dream of privatizing the economy in the same way as the military has privatized defense.

    1. The writer, me, thinks it is unfair for the US to budget spend the defense of the entire West while other countries in the eurozone, for example, cut military spending.

      To call austerity a 40% spending to GDP is like calling ten pizzas “diet”.

      The rest you say is just nonsense.

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