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NYT: British Show Cuts Doom Economy

Mind you, this is not an editorial but a ‘news item,’ from the New York Times:

Pain of British Fiscal Cuts Could Inform U.S. Debate

April 14, 2011

LONDON — In the United States, the debate over how to cut the long-term budget deficit is just getting under way. But in Britain, one year into its own controversial austerity program to plug a gaping fiscal hole, the future is now. And for the moment, the early returns are less than promising.

Retail sales plunged 3.5 percent in March, the sharpest monthly downturn in Britain in 15 years. And a new report by the Center for Economic and Business Research, an independent research group based here, forecasts that real household income will fall by 2 percent this year. That would make Britain’s income squeeze the worst for two consecutive years since the 1930s.

All of which has challenged the view of Britain’s top economic official, George Osborne, that during a time of high deficits and economic weakness, the best approach is to aggressively attack the deficit first, through rapid-fire cuts aimed at the heart of Britain’s welfare state.

You see? Britain has cut its welfare spending by 20% and now it is facing its worst economy since the Great Depression. Wake up America! And never mind that the changes in Britain are probably imperceptible for most people there who are not members of a public sector union or on welfare.

Doing so, says Mr. Osborne, the chancellor of the Exchequer, secures the trust of the financial markets, and thereby ensures the low interest rates necessary for long-term economic growth.

For the record, the UK now enjoys the lowest interest rates in Europe, even lower than Germany, which has a thriving economy.

That approach, and the question of whether it risks stifling an economic recovery that might itself help narrow the budget gap, lies at the root of the deficit debate in the United States.

Naturally, lowering interest rates and taking more money out of the hands of government and putting it into the private economy would stifle the economy. That should go without saying.

On one side is the go-slow strategy favored by President Obama. On the other is the more radical path championed by the Republicans. The two camps are no doubt closely watching Britain’s experiment…

Yes, the Republicans who basically want to return spending to 2008 levels are the radicals here. Not that man who has driven the deficit through the roof, and who still refuses to stop spending.

In Washington, the Republican proposal recently sketched out by Representative Paul D. Ryan of Wisconsin calls for broad and significant cuts in social spending, including Medicare and Medicaid, and wide-ranging tax cuts.

On Wednesday, President Obama called for a more balanced approach, one that he said would combine some tax increases for the wealthy with selective spending cuts that he said would not break the “basic social contract” of programs like Medicare and Medicaid.

You see putting the largest tax increase in history on the very people who run the businesses and hire workers won’t hurt the economy at all. Similarly, refusing to do anything substantial to fix Medicare and Medicaid and completely ignoring Social Security will also help reduce the budget deficit.

While severe in its approach to spending cuts, the British plan lacks the stark sweep of the Republican proposal. Britons will certainly feel pain at the local government level as money dries up for care of the elderly, youth programs and trash collection. But icons like the National Health Service have largely been spared.

What nonsense. Generally speaking, Britain is slashing government spending by 20% across the board. Paul Ryan’s plan doesn’t even come close to that. Would that it did. And they are completely revamping the NHS.

Other notable differences suggest that even Europe’s most conservative party is markedly to the left of the mainstream Republican position in the United States, and in some ways is more liberal than the position Mr. Obama has taken.

To strike a political balance, the coalition government led by Prime Minister David Cameron of the Conservative Party, Mr. Osborne — himself a Conservative — has retained a 50 percent income tax rate on the wealthiest individuals. That is among the highest in Europe, and it imposes more of a burden on the rich than anything Mr. Obama or anyone else in Washington would find politically feasible.

And, lest we forget, the new British government also raised their VAT tax from 17.5% to 20%. They also increased their Capital Gains Tax from 18% to 28%. All of which might explain why their economy is not quite booming.

But in Britain, the big worry now is not tax rates. Instead, the fear is that Mr. Osborne’s emphasis on cuts in social spending — which aim to achieve an approximate budget surplus by 2015 and are likely to result in the loss of more than 300,000 government jobs — might tip the economy back into recession.

You see, even if you keep punishing the rich but don’t keep expanding the underclass and the bureaucracy, The Times will be displeased.

Already the government has had to slash its growth estimate to 1.7 percent, from 2.4 percent, for this year, as consumer incomes are under pressure from high inflation, weak wage growth and stagnant economic activity.

“My view is that we are in serious danger of a double-dip recession,” said Richard Portes, an economist at the London Business School. “This is going to be a cautionary tale.”

Not all economists agree, of course. And this week’s slight improvement in the unemployment rate, to 7.8 percent from 7.9 percent, suggests it is still too early to declare a second slump inevitable.

Note that despite their supposedly dire economic situation the UK’s unemployment rate is lower than America’s. When has that ever happened before?

No one would disagree with Mr. Portes that a deficit of 10 percent of G.D.P. is unsustainable in the long run. But, with the opposition Labour Party, he argues that moving so quickly in the face of weak economic growth is not justified.

Mr. Osborne proposes to slash the deficit to 1.5 percent by 2015. By comparison, the stark program Mr. Ryan offers does not project reaching that deficit target until 2021.

As we said, the British plan is far more draconian than the Republican plan.

Besides the difference in speed, a crucial distinction is how each plan would reach its goal. Mr. Osborne’s plan calls for 75 percent of savings to come from spending cuts, and the rest from mostly indirect revenue and tax increases — an increase in the sales tax, for example.

Look how far down in this piece this information is buried.

Mr. Ryan, on the other hand, proposes to slash spending by $5.8 trillion but — in contrast to the British approach — would allow most of the spending reductions to be offset by $4.2 trillion in tax cuts, rather than applied to closing the deficit gap. In other words, while Mr. Ryan would lean heavily on spending cuts to close the deficit, he also hopes to spur the sort of supply-side economic growth most often discussed when Ronald Reagan was in the White House.

Views that were proved to be correct even beyond the wildest dreams of Mr. Laffer.

But while the continued lure of Reagan-style tax policy seems to have contributed significantly to the Ryan plan, Mr. Osborne has defied the popular caricature of him as a heartless Tory pushing a Thatcheresque agenda. He has refused to cut the tax rate for top earners, despite calls to do so from his party’s right flank and Britain’s powerful financial sector

Which could explain whatever economic problems they are still facing.

This article was posted by Steve on Friday, April 15th, 2011. Comments are currently closed.

7 Responses to “NYT: British Show Cuts Doom Economy”

  1. River0 says:

    Mark Steyn – a Canadian of British stock – has researched the socialist states everywhere. He wrote that the three biggest employers in the world are the Indian National Railway, the Chinese Army, and the National Health system of the UK. I lived there for years, and I know that everyone there knows it’s massively inefficient and below expectations.

    It’s a massive black hole of resources and money.

    • Chase says:

      I lived there for over 5 years, and NHS clinics are dismal, run-down, 1960s era decrepit places generally where the Doctors, referred to as Mister, are every bit as class-conscious as one can imagine, and where the patient is defied to provide his guess at a diagnoses during an exam.

      I had a torn rotator cuff that I waited 7 months to be even seen. Then, I was told it was not a torn rotator cuff, but was shown some book that described a torn rotator cuff, but used simplified layman terms, and was made to feel stupid for suggesting such.

      My wife gave birth to our youngest child there – the bed was terrible, and she was in a ward with about 12 other women, all open.

      A dental check for the children was a counting of teeth, while tapping each of them. No more than 30-45 seconds in the chair, and their annual checkup was done.

      Shrillary and other proponents of socialized health care have no clue, have never experienced it, and of course as the paternalistic elites they are, with separate class of care reserved for them, they never would.

  2. NoNeoCommies says:

    Maybe we should pay more attention to the EU states that are retreating form the Brink that rampant Socialism brought them to.

  3. TerryAnne says:

    Retail sales plunged 3.5 percent in March, the sharpest monthly downturn in Britain in 15 years.

    Someone might have to correct me on this, but isn’t Britain coming out of one of the worst winters – excuse me, worst consecutive winters since 2009? Seems to me crappy weather and having to spend your funds on keeping the radiator (since they don’t seem to be fans of central heating) going or $10/gal+ gas will keep more people from buying stuff than a 2% possible impending cut. I’d also like to think that the coming Royal Nuptuals will cause their economy to skyrocket. I bet there will be the biggest boost in sales in 20 years between March and April.

    And, I’d like to know the number ($) of retail sales in March 1996 and of March 2011. I’m willing to be the sales number ($) was far higher last month than it ever was in 1996. Leave it to the media to not put anything in context; they’ve gotta find the gloom instead.

    • Chase says:

      Yeah, that was my first thought, that perhaps they are all just saving up to buy kitschy souvenirs from this month’s Royal Wedding….

  4. JohnMG says:

    Within four years of the British model of government-owned health care, (1948) the system had already cost three times the projected figures and the whole medical/healthcare fiasco was revealed. In order to keep moving forward it was necessary to curtail services and let the infrastructure (maintenance of existing hospitals and the construction of new hospitals) needs languish.

    I know it is a rhetorical question, but are the NYT people that stupid? For over 60 years no one claims that the NHS is anything but an unmitigated disaster. That it was losing money from the start and that it was doomed to failure unless artificially propped up. And that there would come a time when the pyramid scheme would collapse onto itself.

    The bureaucracy that was first created to administer England’s program is the largest employer of personnel serving the smallest per-capita constituency of any industrialized nation. Everywhere……EVERYWHERE….. this has been tried it has failed. Check out Canada and Austrailia as well. The only reason Canaca’s (Medicare) system isn’t in a worse shambles than it is at present is because of her neighbor to the South. At least the Canucks who can afford to do so come south of the 49th and pay out of pocket to receive what they were promised would cost them nothing at home.

    So if sixty years of piss-poor administration has resulted in a near-total collapse of the NHS in England, it takes a rare strain of stupidity to expect that not even one year of remedial action (you know…..not spending money that doesn’t exist) should reverse the trend.

    If it weren’t for the copy and proof-readers at the Times, they wouldn’t HAVE a readership. I wouldn’t foul the bottom of my bird cage with that rag!

  5. mr_bill says:

    If Congressman Ryan is a radical, I’d love to know what I am. I like his plan, but I don’t think it goes far enough. It will never make it past the old guard “Republicans” like Boehner though. They are too soft and have spent far too long inside the bureaucratic beast.

    Boehner is re-arranging the deck chairs on the Titanic while Ryan is organizing a group to stop the ship from sinking. The “soft Republicans” need to get on the same page as Ryan (and the rest of us who work, pay taxes, and produce goods & services), this is an actual emergency. There will have to be actual and significant cuts to the budget, not just budgetary flim-flam work to create cuts “on paper.”

    The soft Republicans managed to get $38 billion in cuts in the same week in which the government’s deficit spending was $127 billion. That ain’t gonna’ cut it. If they had started the haggling with $1 trillion, maybe we could have seen some meaningful cuts. $30 billion wasn’t ambitious enough. Next time, aim a little higher, you might be surprised at the result.

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