Britain: A new era begins with government spending cuts

LONDON, United Kingdom — After months of anticipation, Britain's Age of Austerity officially began at 12:30 p.m. local time today, when Chancellor of the Exchequer George Osborne made public his "Comprehensive Spending Review" of government expenditure for the next four years.

"Today is the day Britain steps back from the brink," Osborne began his speech to the House of Commons, before laying out his "hard road to a better future."

How hard? The independent Institute for Fiscal Studies has called it the biggest budget reduction since 1945.

When the Chancellor stopped speaking a little over an hour later he had outlined a plan to make good on one of the Conservative Party's electoral promises: to halve Britain's structural deficit in four years — the life of this Parliament.

That means he needs to cut 83 billion pounds ($131.7 billion) of government spending over the next four years.

In 2007, Britain's structural deficit was 3 percent of its $1 trillion GDP, according to the independent Institute of Fiscal Studies. Then Lehman Brothers went bust, the global financial crisis bit and today that figure is 8 percent. Amazingly, even if all Osborne's plans go into effect and work, public spending as a share of GDP will still be 40 percent — about what it was just before the crash.

The Conservative-Liberal Democrat coalition government is taking an enormous gamble, and not with their own money — with the livelihoods of hundreds of thousands of people who work for the government or who are in the private sector but are dependent on government spending for much of their business. The size of government spending will shrink by 20 percent over the next four years.

In human terms that translates to, in Osborne's words, "the public sector head count" declining by 490,000. In normal speak that means about half a million government workers will lose their jobs over that period. In his response to Osborne, Labour's Shadow Chancellor Alan Johnson quoted a report by PricewaterhouseCoopers that estimated about 1 million people throughout the British economy will lose their jobs as a result of today's announcement.

To make matters more difficult, two areas of public expenditure were ring-fenced from Osborne's axe: the National Health Service with its budget of 110 billion pounds (about $175 billion) and the education budget. That meant other government departments had to find extra savings to make up the difference. As always when a major restructuring of government is announced weird anomalies are thrown up.

Here are the major cuts:

- The Defense Department will have 8 percent of its budget cut between now and 2014. 17,000 service people will lose their jobs along with 25,000 civil servants at the Ministry of Defense. Two aircraft carriers commissioned by Gordon Brown's Labour government will be built — the contracts are guaranteed. But they will have no planes when they are launched. The Harrier jump jet, the mainstay of Britain's sea-borne defense system, is to be immediately decommissioned. The replacement jets won't be ready until 2020.

- The BBC will have its public funding frozen for six years. Currently, every television-owning household pays a license fee (tax) of 145 pounds, about $230, toward its operation. The BBC will have to absorb the cost of the World Service — the programming international listeners think of when they think of the BBC — which has previously been funded by the Foreign Office. The Beeb will also have to bear some of the cost of providing high-speed broadband in rural areas. These extra expenditures and the license fee freeze mean that the Beeb's budget is actually being cut by 16 percent in real terms.

- The criminal justice system will be dramatically reduced. It is expected that up to 11,000 police will be let go. New rules on sentencing are to go into effect meaning far fewer convicted criminals will do jail time.

- Welfare accounts for one-third of all government spending and it is the department taking the biggest cuts. All told 39 billion pounds will be knocked off the welfare budget by 2014/15 — that is around $67.7 billion.

- Even the Royal Family is taking a hit. The "Civil List" tax money provided to the Queen and others in the Royal Household to defray their official expenses is to be cut by 14 percent from its current level of 7.9 million pounds ($12.5 million).

The question that hangs over this radical plan is: Is it necessary? More than two-thirds of Britain's trade is with Europe. Yet Britain's public debt is smaller than its biggest European trading partners: German, France and Italy. It is even smaller than that go-to example of unfettered capitalism, Singapore, according to the CIA World Factbook. What will putting another million people out of work do its competitiveness?

But even if you accept that deficit reduction is necessary, is it necessary to do it now? As in the United States, the economy to which it is closest, Britain enjoyed very modest economic growth earlier this year, the result of various stimulus packages put in place following the banking crash. Like in the U.S., that period of growth is slowing to an absolute trickle. In August there was a slight rise in new claims for unemployment insurance. Business confidence surveys, positive earlier in the year, have reversed themselves. The property market has also gone into reverse with prices for houses — the main source of personal wealth in this country — falling by a little more than 3 percent nationwide in September.

So a number of questions hover over today's Osborne speech.

First, the Ireland paradigm: When the bubble burst Ireland was hit harder than any EU country. It had just crawled out of recession when its government embarked on draconian austerity measures to reduce the size of Ireland's deficit, slashing the size of goverment, throwing thousands out of work. The result: Ireland is back in recession. Will that happen in Britain?

Second: How many jobs can the private sector generate over the next four years? Can it find work for the 1 million newly unemployed projected by PriceWaterhouse?

The third question is more general and applies to all countries grappling with debts and deficits unprecedented since the Great Depression. How do you address the mismatch in skills between most of those who lose their jobs and the available work programs governments can afford, like infrastructure projects?

Since the onset of the crisis there have been many articles talking about the great federally funded projects of the 1930s in America, such as the WPA. But could modern workers — who have spent decades working in offices — really build a Hoover Dam or Glacier National Park's Highway to the Sun?

Osborne announced plenty of new apprentice schemes and funding to train people to start and run small businesses. But that still leaves the government as the ultimate source of funding.

The true impact of today's announcement won't become clear until next spring.

If the gamble pays off and the deficit starts to fall and the unemployed find work quickly (they have to pay taxes to make that deficit come down) then the coalition government will be in power until the end of the decade. Deficit hawks in America will be able to point to Britain's example and probably succeed in making their slash and burn intentions toward government mainstream policy. If the gamble doesn't work, George Osborne, who said his public spending review restored "sanity" to the public finances, will find himself hoist by his own petard and very likely in the opposition once again.

Even so, I don't imagine the deficit hawks in America will change their minds.