Wednesday, 20 October 2010

UK cuts 1/5 of government spending - is it possible in the US?

As rolling strikes and violent protests against austerity measures continue to cause chaos in France today, across the channel the new conservative government of David Cameron introduced their much-anticipated package of budget cuts, the biggest slash to the UK budget since World War II. Naturally, the stoic British public is not reacting in the same 'take to the streets' manner of the French in their reaction to Sarkozy's attempts at budget cuts. Instead, there seems to be a sense of profound sadness and anxiety in the UK today.

Put quite simply, the cuts are massive. £83 billion ($130 billion) in cuts were announced this afternoon, an average of 20% out of every government department. 490,000 government employees will lose their jobs. Government offices in London will be cut by a third. Rent will be increased for people in public housing, police services will be cut, local town councils will get less money, and prisons will have less space. The retirement age will be raised to 66 (compared to 62 in the US). Both the sales and income tax will rise, with most of the increases coming out of the salaries of top earners. University teaching budgets will be cut by 75%, meaning the cost of tuition will rise considerably. And the British military isn't immune either, it will see an 8% cut in its budget. Even the queen will have to make do with less. Cameron is giving her a 14% pay cut.

The reaction from the opposition was swift and furious, with shadow chancellor Alan Johnson saying the cuts could destroy Britain's economic recovery and plunge the country back into recession. One could argue that this is the path the British public chose when they gave the most votes to the Conservatives in the May general election. Although it wasn't a ringing endorsement (the Conservatives were unable to win a governing majority to hold power in their own right, instead having to ally with the Liberal Democrats), it was still a choice made by the public. The Conservatives made clear during the campaign that they intended to pursue this austerity strategy, while Labour warned that such a strategy would endanger the economic recovery. The Conservatives won, and Labour lost.

It is a choice that has been made by the people of Europe over and over in general elections over the past three years of economic crisis. So now Europe, dominated by Conservative governments, is pursuing national strategies of drastic cuts in government spending. The reaction from the public has ranged from industrial action and car-burning in France, to voter anger against the government in Germany, to a depressed sigh in the UK.

The situation in Europe is notably the polar opposite of what is happening in the United States. The Obama Administration has pursued the opposite strategy, insisting that drastic cuts to public spending would endanger the economic recovery and instead adopting public spending programs to stimulate the economy. Those packages have had varying degrees of success. Most economists agree that the first TARP fund saved the US financial system from complete collapse and turned what could have been another Great Depression into just a severe recession. Similarly the auto industry bailout is considered a success, preventing the collapse of the American car industry and putting the industry in the advantageous position its in today. On the other hand the subsequent stimulus packages have not yet produced demonstrably encouraging results.

One could say that the American public had a choice just like the European public did – between austerity cuts to shrink the government or proactive government spending to put the economy back on track – and the Americans voted for the latter option. Or did they? The 2008 US election came only shortly after the economic crisis began – less than two months after the collapse of Lehman Brothers. Without a doubt, the economic crisis caused a big move by voters away from Republican nominee John McCain, who has always been shaky on economic issues and made a series or erratic and confusing gestures during the Lehman collapse (McCain himself says that it was the economic collapse that cost him the election). But really, the economy didn't become an issue in the campaign until the very last months, and at that stage most people didn't really know what we were dealing with.

So, flash forward two years later. The size of the stimulus and bailout packages (begun, of course, by the Bush Administration) appears to have terrified a large segment of the American population, and the right-wing news media has ridden that fear all the way to the bank. The nominally fiscally conservative (but in reality more influenced by Social Conservatism) tea party movement has emerged, marching on the streets waging a "war on Washington" demanding an end to government spending.

At first glance, what's been announced in the UK today would be a Tea Party activist's fantasy. Well, that is if it wasn’t taking place in a country which already has national healthcare and a generous social welfare system - that's more of a tea party nightmare!. But the reality is that even if it's these type of austerity measures that these tea party activists want, there is no political party in the US offering that to them.

The Republican Party has sought to ride this wave of anti-government sentiment to victory in November. But though they deliver platitudes about how they are for "reigning in out-of-control spending" and cutting the size of government, they have been unable to name any example of how they would do so. There has been no discussion of raising the US retirement age – and the few Republican candidates that have accidentally said that such a move should be considered have been forced to quickly recant their position by the party. Any cuts to entitlement spending like Medicare and Social Security - by far the largest area of government expenditure - is off the table, the Republicans say. Of course any serious discussion of reducing government spending would have to involve all these things, but the GOP refuses to even entertain the idea. Why? Because these are all things that affect old people, who by far vote in the greatest numbers particularly during a midterm election.

It is the glaring difference between the Republican Party and the conservative parties of Europe – the lack of intellectual honesty. Europe's conservatives are doing what it says on the package. You may not like their positions, and their positions may in the long-run turn out to be bad for the European economy, but at least they are actually taking action. The Republican Party seems to have no such plans. Highlighting the absurd lack of intellectual honesty in their campaign pitch, they have been fighting tooth and nail to extend the temporary Bush tax cuts to the wealthy beyond their set expiration date this year, even as they rail against deficit spending. These tax cuts would of course not be paid for, and would themselves be deficit spending – tax cuts for the wealthy using borrowed money from China.

Across the Atlantic, the British Conservatives are actually raising taxes – an inevitable component of any package that wants to reduce the deficit. The decision is not exactly going to ingratiate them with the public, and it could doom them to holding on to power just for a few years. But they said they would pursue an austerity package to reduce the deficit, and they are sticking to that plan. So are the other conservative parties of Europe. Can you imagine any Republican politician having the same political courage?

The fact is that these tea party folks, and probably most Americans, would not support what the British Conservatives are doing – not only because they are raising taxes, but because they are making painful choices that will have negative consequences for voters like raising the retirement age and cutting pension benefits. And Republicans would certainly never even consider cutting the defense budget as the British conservatives have done. The American people may be in hysteria about the size of the deficit, but by all indications they are not ready to hear the painful truth that tackling it would mean higher taxes and a cut to their retirement benefits. And whether they're ready to hear it or not, nobody's telling it to them. And no matter how the US midterm election goes in two weeks, it's hard to see anyone from either side of the aisle making any tough decisions to cut the programs and comforts so many Americans are used to.


Ilka said...

I think this is a big gamble and it takes a huge risk. Many economists say that cutting spending during an economic recovery is the worst thing you can do. Consumer have no money to start buying things again and the economy stagnates. It happened in the United States in the 1930's. It will be a year or two until we know who was right, Obama or the EU leaders. But I think in the end the US will be better off because they stimulated the economy rather than starving it like Cameron, Sarkozy and Merkel are doing.

Anonymous said...

As a Brit I am just what you said, very sad today. I was shocked as I watched this announcement, and really very frightened. What has happened to this country? We are fast on our way to becoming a third rate power.

Kevin said...

I applaud what the Tories and Lib Dems have done. Yes it's painful, and it took a lot of courage to do it. But it had to be done, and Labour would have had to do the same thing if they had won the election. We are paying £160 million in interest payments EVERY DAY on debt taken out by the Labour government. We spent ten Labour years living beyond our means, wanting Swedish level public services with American level tax rates. It doesn't work, and somebody had to fix the situation. Thank God the Tories have the backbone to do it.