U.K. Chancellor of the Exchequer George Osborne (equivalent to U.S. Secretary Treasury) unleashed a mass bombing in an outline of austerity measures for the United Kingdom. It will be very interesting to watch how this all plays out, as no country on Earth mimics the U.S. more in terms of culture, ethos, and the like than Great Britain. Granted there is more of a ‘socialist’ bent towards the citizens whereas American socialism is focused on large corporations, but both share many Anglo Saxon theories on economic style aside from that. While the Brits do not have the world’s reserve currency, they have the ability to print at will as do we, hence unlike the countries stuck in the European Union the flexibility is much greater in the U.K. If not for the idea that the Bank of England is most assuredly going to strike with more quantitative easing of their own, this type of announcement would have set the British pound on fire.
Considering both countries are running deficits of 10% of GDP, faced massive excesses in the “self regulated” banking sector, an inflated housing market (although much less raw supply in the UK), and recoveries dominated by government spending and central banking printing press, I’d opine the most likely outcome in the near term (if all these reforms go through) is a return to recession. But what should emerge from the other side, should be far healthier (and organic) than the hopped up with opium carcass we are lugging around domestically. But we’ll be best able to tell in about 5-7 years how it all turns out. From an economic standpoint, it should be fascinating to see two diametrically different approaches, if the UK can actually get these through what surely will be an avalanche of protest by every group under the sun which now sucks at the teat of taxpayer money.
Please keep in mind as you read these numbers, U.K. GDP is roughly $2.6T (U.S. GDP about $14T)
Britain outlined the sharpest cuts to public spending since World War II on Wednesday — slashing benefits and cutting public sector jobs with an austerity plan aimed at clearing record debts that swelled during the global financial crisis.
After the country spent billions bailing out indebted banks, and suffered a squeeze on tax revenue and an increase in welfare bills, Treasury chief George Osborne has staked the coalition government’s future on tough economic remedies.
Osborne confirmed there would be 81 billion pounds ($128 billion) in spending cuts through 2015, which he claims are necessary along with some tax increases to wipe out a spending deficit of 109 billion pounds ($172 billion).
As many as half a million public sector jobs will be lost, (wow!) about 18 billion ($28.5 billion) axed from welfare payments and the pension age raised to 66 by 2020, earlier than previously planned.
“It is a hard road, but it leads to a better future,” Osborne said, preparing the public for hardship as he seeks a balanced budget within four years.
Osborne stood on the floor of the House of Commons for more than an hour and dismantled program after program built during the Labour government’s 13-year reign, saying Britain must pay “the bills from a decade of debt.”
As ordinary Britons lose out, Osborne confirmed that a temporary levy on bank balance sheets will be made permanent to “extract the maximum sustainable taxes from the banking system.” (wait, in the U.S. we are told if we do this, they will all move overseas – will Britain have no banks in 3 years? That would be the dogma domestically)
Spending on health, education and overseas aid will be maintained at current levels or increased, while many major transport and climate change projects will go ahead. But almost all other areas of government face average cuts of 19 percent to their budgets — which are severe, but not the 25 percent cuts initially feared. (can you even fathom that America? A cut of 1/5th to almost every government department? We cannot even keep spending FLAT year over year – not to mention a 1% cut)
In one of the most significant proposals, Osborne said the state pension age for men and women will rise to 66 by 2020, four years early. It will alter retirement plans for 5 million people, but save 5 billion pounds ($7.8 billion) a year once it comes into effect.
Recent surveys and protests suggest many Britons are already uneasy, before the impact of spending cuts is even felt. On Tuesday, hundreds of labor union members marched to Parliament — and a handful of climate campaigners climbed atop the Treasury building — to oppose Osborne’s plans.
Osborne yesterday detailed spending cuts to shrink the budget deficit to 2 percent of economic output by 2015 from more than 10 percent today.
These are traumatic changes – from my research there are about 29M workers of all stripes in UK… a loss of 500,000 (not sure over how many years) would be 1.7% of the workforce. Can you imagine the outcry in the U.S. – this is the 1 sector (federal workers) completely bulletproof from a mass layoff – I can’t recall one in my lifetime. And I still can’t get over the 19% drop in spending in almost every category of government… astonishing.
Of course Mr. Osborne says the Bank of England is welcome to fill up the economic hole his mass bombing will create with money printing.
Chancellor of the Exchequer George Osborne signaled that he’s counting on Bank of England Governor Mervyn King to temper any economic slump that might be triggered by the government’s deficit-reduction effort. The austerity plan Osborne announced yesterday has “some caution built in to it and there is of course the freedom for the Bank of England to deploy monetary-policy tools as well,” Osborne told BBC Radio 4’s “Today” show.
Osborne’s comments come as minutes of this month’s Bank of England rate decision, published yesterday, suggest that policy makers are leaning toward expanding emergency bond purchases.
Now in this case, since these cuts are so harsh – I can get behind the central bank providing backstop until the economy adjusts to the new reality… unlike our version which is simply gasoline on top of debt on top of gasoline, sprinkled with debt. Did I mention non stop spending?