Dalibor Rohac is a Research Fellow at the Legatum Institute.
While the federal spending in the United States is exploding, a silent fiscal revolution is taking place in the UK, under the leadership of George Osborne, the Chancellor of the Exchequer. Mr Osborne, who keeps a very low public profile, delivered his 2011 budget speech at the House of Commons last Wednesday.
Unlike Mr Geithner’s fiscal “plan,” which would lead to a doubling of the public debt in the horizon of ten years, Brits seem to be following the path of a genuine fiscal consolidation, and are committed to eliminating the existing structural deficit by the fiscal year 2015/2016.
The fiscal problems in the United States are a very urgent matter, and it is striking how little is being done to address them, on either side of the political spectrum. True, the GOP-proposed cuts would shave some 0.4 percent of GDP off government spending. However, a genuine fiscal consolidation would require massive changes to welfare programmes and entitlements.
This would involve a repeal of Obamacare, and substantial changes to Medicare, Medicaid, eliminating agricultural subsidies, raising the age of retirement, and the like. None of these measures is likely to be popular anytime soon. As a recent WSJ/NBC poll showed, even the Tea Partiers, by a 2-to-1 margin, thought that significant cuts to Social Security were unacceptable.
Yet, as Americans continue to live in a slowly growing economy, adjusting public spending in order to live within the country’s means will become unavoidable.
Much can be learned from Britain’s example. In the last year’s ‘emergency budget,’ presented shortly after the election, the Chancellor has embarked on a program of cutting more than $130 billion from public spending in the course of next 4 years, removing 500,000 people from the public paycheck. Almost a quarter of that reduction in spending is coming from cuts in welfare. The budget imposed a two-year pay freeze for public sector employees, freeze in various social benefits, and a commitment to an accelerated increase of state pension age to 66 years.
The Tories have been able to sugar coat the austerity pill by Mr. Cameron’s ‘Big Society’ agenda which should empower individuals to have more initiative in affairs that used to be the domain of the government. In the future, voluntary groups in communities should be able to run post offices, public libraries, transport systems, and social housing projects. Sceptics say that the ‘Big Society’ is a mere marketing gimmick, not altering the actual manner in which these public services are delivered.
However, the possibility that the UK might be transitioning towards a culture in which private initiative and voluntary, spontaneous organizations are replacing the government in providing a wide array of public services, should serve as a lesson to Americans, who are constantly being nudged by the Obama administration into accepting an increasingly active role played by the federal government.
Moreover, the “Big Society” should register as an important lesson for those who are genuinely concerned with the sore state of America’s public finance and are seeking a political platform to translate their concerns into political action. Slashing government spending is not enough to build a political vision that is appealing to a broader audience. Those who call for a reduction in the size of government should also offer a positive vision of how private initiative can improve America’s social fabric and help the poor and the vulnerable.
Although the fiscal consolidation has triggered a lot political upheaval in the UK, the actual cuts in the 2011 budget are modest – the overall spending has increased by 2 percent compared to the 2010 emergency budget. Contrary to the hysterical reactions on the political Left, the government is not retrenching as I believe it should.
Unsurprisingly, Mr Osborne’s plan does involve tax hikes – the VAT has increased from 17.5 percent to 20 percent, for instance, as has the capital gains tax. However, these changes are accompanied by a gradual reduction of corporate tax rate from 28 percent to 23 percent by 2014/2015. Furthermore, the Chancellor understands well that, in order to limit its impact on the economy, the UK tax system will need to progressively shift away from direct taxation to indirect.
The 2011 budget was unveiled in difficult economic circumstances. The UK’s inflation is at 4.4 percent, very much above its two-percent target, and there are worries that the 2010 deficit target of $242 billion might be missed. However, these adverse factors appear to strengthen, rather than weaken Mr Osborne’s case for prudent and restrained fiscal policy.
Given the existing political constraints, it is not a surprise that the consolidation occurring in the UK is far from perfect. While putting their public finance in order, the Brits might be missing a rare chance to radically downsize their government.
But the relevant question for Americans is whether are willing to draw at least some lessons from the British example or whether they decide to stride down the path of fiscal profligacy, leading ultimately to national ruin.
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