The English patient
REASONABLE ECONOMISTS can differ about whether the United Kingdom's austerity plan is too austere, too soon. Certainly, an immediate retrenchment of this magnitude would not make sense for the United States, nor is it necessary: The United States, with a global reserve currency, is in a stronger and more independent economic position than is the United Kingdom. But the plan unveiled last week by Britain's coalition government offers a useful and, in many ways, impressive example of what a serious approach to deficit-cutting entails -- and will eventually require from U.S. policymakers.
The budget-balancing plan would reduce spending by $128 billion over four years -- equivalent to about $650 billion in cuts in U.S. government spending. From the U.S. perspective, several aspects of the plan are striking. Almost unthinkable from Republicans here, the Conservative Party government embraced a mix of spending cuts (77 percent) and tax increases (23 percent), including increases in the value-added tax and the capital gains rate for higher-income taxpayers. Almost unthinkable from Democrats here, the Labor opposition agreed that drastic spending cuts were called for. The disagreement between the two camps concerned the proper distribution and magnitude of cuts: The Conservative-Liberal Democrat coalition envisioned cuts averaging 25 percent per government department while Labor, in theory at least, acknowledged the need for cuts averaging 20 percent.
Almost unthinkable from both parties here, the plan tackles some -- although far from all -- entitlement spending. The budget of the politically untouchable Public Health Service will actually go up in nominal terms. The government will means-test the "child benefit," an automatic payment to families based on the number of children they have, but it left intact such other universal benefits as seniors' winter fuel payments and free bus passes. A previously scheduled increase in the retirement age was accelerated by several years; it will rise from 65 for men and 60 for women to 66 for both genders by 2020. Nearly 500,000 government jobs -- about one in 10 -- will be cut, and government employees will have to ante up more for their pensions.
There are legitimate questions about whether the cuts could have been distributed more fairly. The government claims that, in the words of Prime Minister David Cameron, "those with broader shoulders" have been asked to "bear a greater load." But the Institute for Fiscal Studies found that the cuts would fall disproportionately on working families with children -- although, even in the IFS analysis, the richest 2 percent take the biggest hit. Similarly, the scope of cuts to defense spending is of concern. The government argues that the 8 percent cut will still leave U.K. defense spending above 2 percent of gross domestic product, the NATO-recommended level; British efforts in Afghanistan will be fully funded, officials say. But the reductions can only heighten concern about the extent to which Europe can play its traditional role as military ally to the United States.
The British exercise demonstrates the painful realities that budget balancing entails -- realities that politicians of both parties in the United States have yet to grapple with.