U.K. Budget Cuts: Could U.S. Politicians Be This Pragmatic?

Yesterday the new U.K. Chancellor of the Exchequer, George Osborne, announced a sweeping "emergency budget" intended to cut the country's high fiscal deficits, in the hope of avoiding the calamities in the public debt markets of Greece, Portugal, Ireland and Spain. Similar pressures are not facing the U.S. bond market or the dollar, and so the Obama administration has not proposed such drastic cuts to U.S. spending. But sooner or later we may have to make similar adjustments to our inflated government, and while there are structural differences in the economies, the U.K.'s courageous moves may provide a preview of what we're in for.

The recently-elected Conservative-Liberal Democrat coalition put forth a bold budget (or rather Budget -- the London papers treat it as a proper noun) that calls for big cuts to social spending as well as a big shakeup of the British tax system.

For some perspective, the U.K. economy looks to be about US$ 2.3 trillion, and total government spending is about one-third of that. U.S. GDP is about $14 trillion, and our government budget is quite a bit smaller: in 2008, before it was bloated by the stimulus, was $3 trillion, or about 20 percent. But we don't have universal national health care -- see the summary of the U.K. government budget below.

The Guardian, a quality, if left-leaning, U.K. newspaper, reports the budget cuts:

Osborne announced yesterday he wanted to see £83bn of savings by 2014-15.

Every area of government - apart from the [National Health Service] and overseas development aid, which the coalition has promised to protect - will have to reduce its budget by an average of 25% unless the Department for Work and Pensions can come up with further savings in the welfare bill on top of those announced yesterday.

[Yesterday's news: Thousands of mothers and pregnant women will have benefits and other payments cut or frozen following the budget, bringing accusations from lobby groups that the poor are being made to bear the brunt of cuts.

...

Spending on tax credits had risen from £18bn in 2003 to £30bn now, he said, and there were 150,000 families with incomes of more than £50,000 who claimed tax credits, with some families earning up to £83,000 still able to claim.]

...

[Osborne] presented the choice as one between cuts in welfare and cuts in public spending, saying that departments would not have to reduce expenditure by the planned 25% if further welfare savings could be identified.

"If over the coming couple of months we can find further savings in the welfare budget, then we can bring that 25% number down," he said.

"In the end, that is the trade-off not just between departments but also between the very large welfare bill and the departmental expenditure bill. That's why we are having this big public engagement through the spending review process so that as a country we can come to that decision collectively."

I don't know U.K. politics that well, so I can't say whether it's realistic to talk about a "collective decision." The London papers do quote Labour party leaders saying that the budget moves seem inspired by the Conservative part of the coalition, and are disproportionately harming the poor.

Although deficits in the U.S. are plenty big, the world financial markets are not yet pressuring our bond market. Quite the opposite: we benefit from the flight to the relative safety of the dollar, so that the rate on the 10-year Treasury bond is a painfully low 3.10 percent. (My personal portfolio has been positioned to benefit from higher rates for some time, to no avail.)

Sooner or later, though, we will face this sort of budget-cutting reality. The story goes that because we're obligated to fund defense, Social Security and Medicare, interest on the national debt, and much more, spending cuts in the discretionary areas don't offer much saving. That leaves the equally appalling option of higher taxes. More on that tomorrow.

I will close with a comment on the U.K. news from Andrew Ian Dodge at the Washington Examiner:

One can only speculate if a mixed Republican and Democrat dominated House and Senate would be able to stomach such stiff cuts. The tea party movement should be looking to the new UK budget with approval and admiration. Would any American national politician dare to propose such brave cuts to lower the deficit and decrease spending?