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Britain plans $131 billion in spending cuts by 2015

By Anthony Faiola
Washington Post Foreign Service
Thursday, October 21, 2010; 12:25 AM

LONDON -- Britain unveiled on Wednesday a campaign to dig itself out from under a mountain of public debt, setting up a global experiment: Can a major nation drastically slash government spending without derailing its economic recovery?

The new Conservative-led coalition headed by Prime Minister David Cameron announced cuts deeper than the ones made by Margaret Thatcher in the 1980s, outlining a plan to eliminate half a million government jobs, slash welfare benefits and reduce $131 billion worth of other public spending on everything from fighter jets to social security to the arts by 2015.

The effort puts Britain at the core of the debate over how fast, and how deep, to cut the crushing levels of public debt racked up by governments from the United States to Europe and now viewed by leading economists as one of the greatest threats to the global economy. Britain's pull-the-bandage-off-fast approach now stands in sharp contrast to the thinking in Washington, where senior administration officials are leery of the impact such drastic steps could have on the U.S. recovery, and where further increases in funding are still being considered.

The new coalition is gambling its political future on a bet that Britons will embrace a painful new age of austerity after years of big-spending Labor governments under prime ministers Gordon Brown and Tony Blair.

In the aftermath of the financial crisis -- with collapsing tax revenue and soaring stimulus spending -- the budget deficit here is one of the highest in the industrialized world, standing at 11.5 percent of economic output, or slightly higher than in the United States.

Now, budget cuts are set to yank billions out of the British economy, costing jobs that may not be offset by the private sector and potentially stalling the still-fragile economic recovery.

The move in Britain comes as nations across Europe are rolling back government spending ramped up after the financial crisis, overhauling even long-sacred social safety nets in the drive for fiscal austerity. In particular, cash-strapped Spain, Ireland and Greece, which needed an international bailout, are making cuts to convince investors they can still pay their bills, touching off increasingly violent strikes from unionists.

On Wednesday in France, for instance, angry protesters opposed to government efforts to boost the retirement age clashed with baton-wielding police, blocking roads, smashing storefront windows and ring-fencing gas depots. In recent weeks, more limited strikes have temporarily shut down London's Underground transit system, stranding millions of passengers.

Nevertheless, British officials have decided that a potential loss of market confidence and the weight of the debt on the economy and the British pound are now the greater threat.

"Today is the day when Britain steps back from the brink, when we confront the bills of a decade of debt," George Osborne, the chancellor of the exchequer, or Britain's treasury secretary, declared before Parliament on Wednesday.

The effort here is set to transform the British welfare state, setting new limits on benefits for the poor and raising the retirement age for millions of Britons. Fewer police officers will soon be on the streets, and train fares and college tuitions will rise. One in 12 government employees is set to lose their job.

Yet the British, unlike their peers in continental Europe, appear culturally more willing to cope with what Cameron has dubbed a new "age of austerity," with polls showing almost twice as many Britons supporting deep debt reduction as opposing it.

In announcing the long-anticipated cuts Wednesday, the government portrayed its campaign as fair to the poor, arguing that the wealthy, through new taxes and benefit cuts, will proportionally shoulder more of the burden. But critics and leading think tanks have accused the government of being duplicitous, saying that women and the poor, who depend more on public services, are set to bear the brunt of the pain.

As previously promised, the government announced that it would present legislation for a permanent levy on large banks, calling it an insurance policy against another financial crisis. The venerable BBC -- Britain's state-funded television, radio and Internet media giant -- is set to sustain withering cuts of more than 16 percent of its budget, with even steeper reductions in government funding for the arts, including London museums and theaters.

And as Britain moves to close costly prisons, the hard-hit Justice Ministry said it would employ new rehabilitation tactics to cut the number of criminals behind bars for minor crimes.

Rodney Barker, a professor of government at the London School of Economics and Political Science, said Britain was unlikely to face crippling industrial strikes like the ones that erupted during Thatcher's crusade to shrink government and break the unions in the 1980s.

"Most trade unionists realize that old-fashioned protest is counterproductive," Barker said.

But he warned of a current of public anger spreading from other groups, including middle-class families and single parents hit by the government's decision to scrap child benefits for anyone earning more than $70,000 a year.

A far greater risk, economists say, is that Britain might find itself in a situation similar to that in neighboring Ireland, where a year-old attempt to impose deep budget cuts has quashed consumer sentiment and plunged the economy back into negative territory.

"The government is taking a big gamble," said Paola Subacchi, an international economics expert at Chatham House, a London-based think tank. "It is asking the nation to tighten its belts for a number of years in order to find a new path to prosperity. But if you don't get it right, you might implode growth, and it's a disaster."

In the United States, officials have also signaled a desire to trim the deficit. Federal Reserve Chairman Ben S. Bernanke warned this month that it was "crucially important" to "put U.S. fiscal policy on a sustainable path." A bipartisan commission is set to deliver recommendations on how to cut the deficit in December.

But the process in Washington is moving far slower than in London, in part because of deep concerns that cutting too much too soon could damage the still-fragile U.S. recovery.

Asked about the gap, Mark Hoban, Britain's financial secretary to the Treasury, told The Washington Post: "We have made our choice. I have to leave it to the Americans to decide in the midterm elections whether [the Obama administration's] policy is right."

faiolaa@washpost.com

Special correspondent Rebecca Omonira-Oyekanmi contributed to this report.

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