UK Austerity Offers Inspiration and Reveals Difficult Political Reality for US

Published May 4, 2011

With its government shutdown-averting budget compromise in April, the United States government made its first tentative turn towards austerity. For David Cameron’s United Kingdom government, this theme is now fully developed.

Cameron is the UK’s prime minister. In late March his Chancellor, George Osborne, unveiled the Conservative-Liberal Democrat Coalition’s first full-year budget, and, with it, the outline of British fiscal policy for the next half-decade. As a comprehensive plan by a government determined to control spending, the British budget illustrates both the possibilities and limitations likely to face the authors of American austerity initiatives.

In Washington, any cuts beyond a paltry $38 billion in discretionary spending remain mere speculation. In Westminster, the cuts in the 2011 UK budget come on top of a series of deficit reduction efforts dating to the Cameron government’s ascension in May 2010. Combined with, for example, last year’s sweeping defense cuts and increased university fees, the new budget estimates a deficit of £122 billion ($200 billion) for April 2011-April 2012, down from £146 billion ($239 billion) the previous year.

Parliamentary Prerogatives a Plus
The British governing parties, with their parliamentary ability to unilaterally enact legislation, can impose a fiscal roadmap for the entirety of their five years in government. Thus, in his announcement of the 2011 budget, Osborne also said the deficit would continue to decrease yearly. By the 2015-16 fiscal year, just in time for the next mandatory general election, the British deficit would be under thirty billion pounds, and public debt as a percentage of gross domestic product would have begun to fall.

The enterprise relies on spending cuts and a return to robust economic growth. To that end, the budget includes investment-related tax credits, initiatives to increase available credit for small businesses, and 21 new “enterprise zones” around the UK. Tax breaks are coupled with simplifications. A projected £1 billion ($1.63 billion) in tax loopholes and deductions will be eliminated.

Inquiries have been launched into the possibility of merging National Insurance, the rough equivalent of payroll tax, and income tax. On entitlements, the multitude of benefits currently offered could be replaced in 2013 with a single “universal credit” subject to a household cap, potentially saving £18 billion ($29 billion).

Ryan’s ‘Path to Prosperity’
One might note that Wisconsin Congressman Paul Ryan’s “Path to Prosperity” evokes principles strikingly similar to the above. This plan anticipates a return to smaller deficits and relies on a speedy increase in economic growth to make good its projections. It recommends complementing tax rate reductions and code simplifications. Entitlements are, where possible, commuted to a simplified regime of block payments to states.

None of this should suggest, however, that the British budget lights the way for perfectly sound fiscal policy on both side of the Atlantic. Rather, the Coalition budget’s parallels with the GOP’s 2011 budget compromise and the Ryan Plan inevitably extend to their limitations.

In London, hundreds of thousands of union supporters and students stage increasingly violence-ridden protests against “savage cuts.” In Washington, D.C. and Madison, Wisconsin, public sector workers stubbornly resist reductions.

Cameron’s government will, despite all the efforts outlined above, spend slightly more in the coming fiscal year than the last. Even if Ryan’s plan were implemented in its entirety, federal spending would, by his paper’s own estimates, exceed 2011 levels by 2015.

No Balance in Near Future
Neither plan, for all their rhetoric, actually anticipates a return to a balanced budget in the near term, instead defining victory with an intermediate goal. George Osborne has chosen the abolition by 2015 of the UK’s “structural deficit,” the budget shortfall as adjusted for the weak global economy. Ryan, meanwhile, heralds the reacquisition of “primary balance,” the lack of a deficit if interest payments on existing US debt are disregarded, by the same year.

Despite their focus on enterprise and spending reform, Cameron’s and Osborne’s budget introduces practically as many government programs as it eliminates. It is rife with such classic government sinkholes as new rail projects, educational initiatives and home buying assistance schemes, including extending public support of troubled mortgages.

Attendant to, as Osborne put it, “Our determination to be the greenest government ever,” these are joined by ever-expanding subsidies for uneconomical energy sources, a £16 ($26)/metric ton carbon “price-floor” and a “green” investment bank. Recent hikes to the value-added tax, alcohol and tobacco duties, and National Insurance contributions outline the importance of increased taxation to the Coalition’s deficit reduction.

Spending as Share of Economy
Like Osborne, Paul Ryan makes no attempt to shrink government expenditures relative to the economy as a whole below pre-financial crisis levels, in the US case around 20 percent. Even that assumes its implementation in its current form, a near political impossibility.

The shortcomings of the British legislation, the product of a deficit-concerned parliamentary government with little in the way of formal checks on its power, provide a potent warning in this regard. The compromises necessary to secure acceptance of Osborne’s budget by the Coalition’s own members and the British public provide a clue to the modifications American austerity plans might accrue in their realization.

With the American political system, the polarized American electorate and the divisions in Washington’s power structure, deficit hawks will struggle to keep their proposals as focused as those of their British counterparts.

Ian Mason ([email protected]) is originally from Chicago and now writes from Edinburgh, Scotland.