Is globalization a threat to the public sector?

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Many people believe that globalization is a threat to the public sector.  This is true even though public sector workers do not have to compete with foreigners for their jobs.  The threat comes from the effects of globalization on taxation.

In the private sector, globalization can be a threat because factories or other workplaces can be moved overseas, taking jobs with them.  This is not possible in the public sector.  However, the public sector does have to depend on the private sector for support. Private sector taxes pay public sector workers’ salaries.  Globalization makes it harder for governments to tax their people and thereby threatens the public sector.

If a country’s government sets its taxes too high, businesses can often leave the country.  This is possible because of globalization.  If government sets tax rates too high, investors might worry about the country’s competitiveness and they might move their money to other countries.  In both cases, the country’s tax base will be reduced.  When the tax base is reduced, there is less tax revenue that can be used to pay for public sector jobs.  This is the mechanism by which, many people say, globalization can threaten the public sector.

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