November 26, 2020

News Analysis: As Deficit Debate Begins in U.S., Less-Than-Promising Results in Britain

But in Britain, one year into its own austerity program to plug a gaping fiscal hole, the future is now. And for the moment, the early returns are less than promising.

Retail sales plunged 3.5 percent in March, the sharpest monthly downturn in Britain in 15 years. And a new report by the Center for Economic and Business Research, an independent research group in London, forecasts that real household incomes will fall 2 percent in 2011. That would make Britain’s income squeeze the worst two years in a row since the 1930s.

All of which has challenged the view of Britain’s top economic official, George Osborne, that during a time of high deficits and economic weakness, the best approach is to aggressively attack the deficit first, through rapid-fire cuts aimed at the heart of Britain’s welfare state. Doing so, according to Mr. Osborne, the chancellor of the Exchequer, secures the trust of the financial markets — thereby ensuring the low interest rates necessary for long-term economic growth.

That approach, and the question of whether it risks stifling an economic recovery that might itself help reduce the budget gap, lies at the root of the deficit debate in America. On one side is the go-slow approach favored by President Barack Obama. On the other is a more radical path advocated by the opposition Republicans. Both camps are no doubt closely watching Britain’s experiment.

On paper at least, both countries face broadly similar deficit challenges. Britain aims to close a fiscal gap of about 10 percent of gross domestic product; the comparable figure in the United States is projected at 9.8 percent.

In Washington, the Republican proposal recently sketched out by Representative Paul D. Ryan of Wisconsin calls for broad and significant cuts in social spending, including the Medicare and Medicaid health benefits for the old and the needy, as well as wide-ranging tax cuts. On Wednesday, Mr. Obama called for a more balanced approach, one that would combine some tax increases for the wealthy with selective spending cuts that he said would not break the “basic social contract” of programs like Medicare and Medicaid.

While severe in its approach to spending cuts, the British approach lacks the broad sweep of the Republican proposal. Britons will certainly feel pain at the local government level as funds dry up for care for the elderly, youth programs and trash collection. But in contrast to the Ryan plan, icons like the National Health Service have largely been spared.

There are other notable differences that suggest that even Europe’s most conservative party is markedly to the left of the mainstream Republican position in the United States and in some ways even more liberal than the position Mr. Obama has taken.

To strike a political balance, for example, the coalition government led by the Conservative prime minister, David Cameron, has retained a 50 percent income tax rate on the wealthiest individuals. That is among the highest in Europe, and it imposes more of a burden on the rich than anything Mr. Obama or anyone else in Washington would find politically feasible.

Elsewhere in Europe, countries like Ireland and Greece have had to confront deepening economic slumps as they put in place harsh austerity programs. The bond market has given them little credit for their efforts, punishing those countries’ 10-year government bonds with interest rates in or close to double digits.

But here in Britain, the big worry right now is not tax rates or high borrowing costs. Instead, the fear is that Mr. Osborne’s emphasis on social-spending cuts — which aim to achieve an approximate budget surplus by 2015 and are likely to result in the loss of more than 300,000 government jobs — threatens to tip the economy back into recession.

Already the government has had to cut its estimate for economic growth to 1.7 percent for this year from 2.4 percent, as consumer incomes are under pressure from high inflation, weak wage growth and stagnant economic activity.

“My view is that we are in serious danger of a double-dip recession,” said Richard Portes, an economist at the London Business School. “It is hard to see where demand is going to come from. This is going to be a cautionary tale.”

Not all economists agree, of course. And a slight improvement in the unemployment rate announced this week, to 7.8 percent, suggests it is still too early to declare a second slump inevitable.

No one would disagree with Mr. Portes that a deficit of 10 percent of G.D.P. is unsustainable over the long run. But, along with the opposition Labour party, he argues that moving so quickly in the face of weak economic growth is not justified.

The British government’s deficit-cutting plan is arguably the most aggressive by any economy that has not been compelled to take austerity measures as part of a bailout from the International Monetary Fund. Mr. Osborne proposes to cut the deficit to 1.5 percent of G.D.P. by 2015. By comparison, even the stark program put forward by Congressman Ryan does not project reaching that same goal until 2021.

Besides the speed, the crucial difference is how the two plans get there. Mr. Osborne’s plan calls for 75 percent of savings to come from spending cuts, and the rest from mostly indirect revenue and tax increases. That is not far off from the mix President Obama has proposed.

Mr. Ryan, on the other hand, proposes to reduce spending by $5.8 trillion but, in direct contrast to the British approach, would allow most of the spending reductions to be offset by $4.2 trillion in tax cuts rather than applied to closing the deficit gap. In other words, Mr. Ryan would not only lean almost completely on spending cuts to close the deficit, he is also hoping to spur the sort of supply-side economic growth most often discussed back when Ronald Reagan was in the White House.

Article source: http://www.nytimes.com/2011/04/15/business/global/15iht-pound15.html?partner=rss&emc=rss

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