Britain outlines deep spending cuts
As the worldwide recession continues to hit balance sheets, some countries are taking dramatic steps to regain control of their finances. As we wrote earlier this week, France is moving to raise its retirement age from 60 to 62, a measure that has been met with strikes and protests. Britain is taking it a step farther. Yesterday, the British government unveiled a package of deep public spending cuts to, as Britain’s top finance minister, George Osborne, put it, bring the country “back from the brink.”
The spending cuts are Britain’s steepest in 60 years and include reducing government department budgets by an average of 19 percent, reducing welfare benefits, raising the retirement age to 66 by 2020, and cutting nearly half a million public-sector jobs. The cuts are expected to save the British government $130 billion by 2015. The cuts couldn’t have come sooner for a country facing one of the highest budget deficits in the developed world. Britain’s deficit is currently “11.5 percent of total economic output, compared with 10.7 percent for the United States and 5.4 percent for Germany.”
The New York Times details more proposed cuts:
[P]ayments to the long-term unemployed who fail to seek jobs will be cut…saving $11 billion a year. Additionally…a new 12-month limit will be imposed on long-term jobless benefits, and measures will be taken to curb benefit fraud.
Mr. Osborne promised annual savings of 7.1 percent in the budgets of local government councils and said there would be a freeze followed by a 14 percent cut in tax money allocated to maintaining Queen Elizabeth II’s household. Military spending will be cut by 8 percent by 2014.
Spending on the police will be cut by 4 percent a year.
Britain’s diplomatic corps — the Foreign Office — would lose 24 percent of its financing and cut the number of workers at the headquarters in London. Additionally, the BBC will take over financing the BBC World Service and several other responsibilities, saving the government about $539 million a year
Mr. Osborne said that administrative costs in the Department of Culture, Media and Sport and in quasigovernmental arts organizations would be reduced by 41 percent.
The British government expects the private-sector to get a boost from the public-sector cuts and make up for the anticipated job losses.
It is also supplementing the spending cuts with tax increases. Notably, Britain’s value-added tax, or VAT, will increase from 17.5 percent to 20 percent, a potentially dangerous decision. In our latest fiscal cheat sheet, we reveal that over-spending, not under-taxing, is the root cause behind yawning budget deficits. Furthermore, a recent report revealed that if just a 10.3 percent VAT was instituted in the U.S., 850,000 jobs would be immediately lost.
Beyond the deep cuts in Britain, the cut-spending-mentality that has started to spread throughout European governments is more evidence of a wholesale European rejection of Keynesianism and the notion that deficit spending is necessary to climb out of a recession. The New York Times elaborates:
[I]n much of Europe, and most acutely here in the land of his birth, his view that deficit spending by governments is crucial to avoiding a long recession has lately been willfully ignored.
Indeed, across Europe, where the threat of a double-dip recession remains palpable, governments from Germany to Greece are slashing public outlays. But even as students and workers in France clash with the police and block fuel shipments to protest a rise in the retirement age, the debate in Europe is more on how fast to cut government spending rather than whether such reductions are the right thing to do under the circumstances.
[I]n Europe there is hardly a policy maker to be found who is making the argument that governments need to spend more, not less.