U.K. spending cuts foretell our future

NationalPost.com – Opinion/FinancialPost.com – U.S. politicians are going to have to follow the British model
October 20, 2010.    Terence Corcoran

In what are being called the United Kingdom’s “worst” government spending cuts since the Second World War, the coalition government of Conservative Prime Minister David Cameron Wednesday delivered a message that is soon to be heard around the world. It’s a message already received this year in Greece and now daily in France, where demonstrations, roadblocks and violent protest are disrupting the economy. It’s a message that will sooner or later sweep across North America.

The words in the message are austerity, spending reductions, fiscal restraint, government layoffs, deficit elimination, debt reduction, spending freezes, job cuts and reduced entitlements, tax increases and lower benefits. Nobody wants to hear of this in the United States, where the fiscal tsunami has yet to land.

The outlook is less bleak for Canada, where debt and deficits are not as large. But there are few signs that any Canadian politician is ready to fully acknowledge the discipline that will eventually be needed to unravel Canada’s fiscal situation.

Usually, it takes a crisis of currency and confidence to trigger action — as happened Wednesday in the United Kingdom.

“Today’s the day when Britain steps back from the brink,” Chancellor of the Exchequer George Osborne said Wednesday as he unveiled spending cuts that many are calling Draconian and that British labour leaders say are an “immoral” attack on the British people.

The reforms certainly contain some dramatic policy moves, including cutting £18-billion ($29-billion) from some welfare payments, raising the age of eligibility for the national pension plan to 66 from 65, the loss of 500,000 government jobs and cuts to spending that average 19% over four years in most non-core government departments.

A PriceWaterHouseCoopers commentary said the shifts in government spending, worth £83-billion ($134-billion) over the period, could wipe out another 500,000 jobs in the private sector.

The spending reductions are part of a broader Cameron coalition budget reform package announced last June to stop Britain’s slide into financial chaos. The government’s annual deficit had soared to 11% of GDP and the country’s total net debt had soared to £952-million, or $1.5-billion, equal to 60% of GDP.

The spending cuts, while high profile, still leave the government in control of an excessively large chunk of the economy. The government expects to be spending £652-billion ($1.1-trillion) by 2014, when the budget is supposed to be back in “structural balance.”

Wednesday’s cuts may be the most Draconian since the Second World War — a slogan concocted by a think-tank last June — but the Cameron Tories still managed to protect some of the dumbest spending initiatives. It boasts that its “climate change commitments are also protected,” including a £5,000 ($8,000) incentive for buyers of new low-emission vehicles and plans to subsidize electric car infrastructure.

Billions are still be allocated to experimental carbon sequestration schemes and, in a sly move, a so-called carbon tax on big business will continue to be collected, but the money — up to £1-billion ($1.6-billion) a year — will now go straight to public spending instead of supporting green technology as originally planned.

Even while in crisis, governments are more than willing to continue their big spending ways.

In Canada and the United States, where the adverse effects of extended deficit spending — on currency values, growth, tax rates, jobs and investment — are still not severe enough or obvious enough to trigger a crisis, there’s a sense that reversing deficits and reducing debt can be put off.

But the trends behind the deficits are not going away. The U.K. spending cuts and French President Nicolas Sarkozy’s attempts to revamp France’s pension system are the kinds of reforms that loom for the United States and Canada.

Barring the arrival of a growth miracle, U.S. government deficits and debts are destined to produce a crisis. The only question is how and when the crisis will strike, ultimately forcing a U.S. president to follow the U.K. example: “Today’s the day when the United States steps back from the brink.”

U.S. deficits and debts are at U.K. levels now, the debt in part supported by the U.S. dollar’s role as a reserve currency and monetary policy that keeps interest rates at rock-bottom levels. The U.S. social security and health-care safety net is a greater long-term burden. Eventually, U.S. politicians are going to have to follow the French and British models by trimming benefits and making massive spending cuts, at the risk of political and economic turmoil.

Canada looks great on paper, but the dynamics of future developments are wildly unpredictable. When Ottawa moved to trim deficits and reduce the debt in the 1990s, the task was made relatively easy by strong economic
growth and booming economic activity in the United States. The net national debt (federal and provincial) as a percentage of GDP fell to 28% from a high of 70% in the mid-1990s — thanks to high average annual nominal and real growth rates.

The only way out of these deficits and debts is the route the British government took Wednesday. By 2014, Ottawa’s net debt will equal $650-billion. The provinces will exceed $350-billion, for a national total of more than $1-trillion. Big numbers considering that economists now believe Canada’s long-run growth is likely limited to 2%, with nominal growth at maybe 4%. At that level, funding debt reduction is going to require more aggressive fiscal action than the reduction effort of the 1990s.

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