Opinion: Cut spending, raise taxes. Can it make a difference?
LONDON — At half past twelve, Britain's 39-year-old chancellor of the Exchequer rose from his place and ushered in a new era of austerity in British life.
With national debt, according to the Institute of Fiscal Studies standing at £770 billion ($1.1 trillion), and annual interest payments of 70 billion and rising, Osborne called this budget "unavoidable."
When he sat down an hour later he had ladled out pain to everyone. The headline is a rise in VAT (a sales tax on everything except food and children's clothing) from 17.5 percent to 20 percent starting in January. Then there's a £2 billion ($2.9 billion) tax on bank balance sheets (based on a formula so complicated it is impossible for me to explain). And an increase in the capital gains tax for people earning more than £50,000 ($74,000) a year.
But that's only a portion of the hurt. The government is going to shrink and shrink fast. Except for the National Health Service, departmental budgets are going to be cut by a quarter over the next five years. As the state is the source of 50 percent of national income in Britain, shrinking its size so dramatically is a risk.
Osborne and his boss, Prime Minister David Cameron, knew this austerity would be a tough sell and like farmers preparing a long fallow-field for new planting, they and their Liberal Democrat partners in Britain's coalition of the Con-Dem'd, have spent much of the six weeks since they came into office telling the people of the United Kingdom that things were going to hurt.
How bad will it hurt? It doesn't bear thinking about.
If the banking collapse and contraction of 2007-2008 represented the worst economic downturn since the 1930's then the austerity measures needed to bring down Britain's deficit — a bit more than 11 percent of GDP, the highest in Europe — will have to be of a similarly historic nature. That's a reasonable summary of the government's basic line. Early indications are that Cameron's attempt to soften the soil of British society sufficiently to receive the seed of austerity has succeeded, if this poll is any indication.
One important part of the strategy was to raise the specter of Freddy Kruger, aka the international markets. Even before the coalition was formed, Osborne was warning that the currency and bond traders were lined up at their desks in London itching to do to Britain what they did to Greece, destroy the currency and demand mafia-like interest rates on government bonds.
Osborne referenced the markets within the first five minutes of today's speech even though he had already begun to appease them. Last week £10.5 billion ($15.5 billion) worth of projects that had been green lit by the Labour Government at the start of the year were shelved.
Big-ticket items and small-ticket items were on the list: a billion pounds in re-training programs and relief for the unemployed, a £450 million ($665 million) new hospital, and free swimming for children under 5 and senior citizens.
The headline catcher was the cancellation of an £80 million ($118 million) loan for new equipment to Sheffield Forgemasters, a firm specializing in the manufacture of steel casings for nuclear reactors. That's "loan" not a "gift," the money would eventually have been repaid. But the business is in the constituency of Deputy Prime Minister Nick Clegg of the Liberal Democrat Party and perhaps an example had to be made so the message would be clear: there will be no favoritism when shrinking the state.
There will be much more to come.
http://www.globalpost.com/dispatch/united-kingdom/100622/uk-economy-time-the-thin-upper-lip
Print
