Cameron Gets Ahead of the Game on the British Deficit -- But Puts the Economy at Risk

David Cameron, the new British prime minister, seized the moment today in an impressive display of what words alone can do when uttered in the right context. With bond vigilantes and credit rating agencies lurking around the corner, he is taking the gutsy decision to accelerate spending cuts to reduce the country's deficit -- risking damage to already tepid economic growth.

Happily enough, Americans are being spared the choice that Cameron apparently decided had to be announced when he stood in front of 10 Downing Street alongside coalition partner Nick Clegg of the Liberal Democrats.

Right now, the Obama administration and most sane economists advocate fiscal consolidation, but not for a few years, when the economy is on firmer ground and the dark unemployment picture brightens. "First, growth." That's a good thing because sources of demand for the economy, other than government spending, are still pretty limited. And the Federal Reserve is effectively lending money at zero interest rates, suggesting the U.S. still faces a liquidity trap that limits the Fed's room for maneuver.

Britain is in essentially the same spot, but Cameron has decided it does not have the fiscal room for maneuver that the United States does. Today, it is hard to find a dissenting voice among market commentators.

Last year, Standard & Poor's downgraded the outlook for Britain's AAA rating from stable to negative. Only a few days ago, the European Commission concluded in a report that Britain's budget deficit will hit 12 percent of GDP this year. That's worse than Greece after factoring it the cuts it already plans.

Worse than Greece? That really resonates in Britain, and highlights how it was possible, politically, for Cameron to campaign on a pledge to reduce the deficit.

In short, if Britain does not act, it gets rising borrowing costs and a plummeting pound. "You really cannot afford to delay the fiscal adjustment," Erik Nielsen, the chief economist at Goldman Sachs, told me in an email from London.

Mervyn King, the governor of the Bank of England, offered up his own support for the plan, helping to fire market enthusiasm on Wednesday.

But in truth, Cameron and Clegg did the heavy lifting. A new government, keen to get the value of the "announcement effect" of a shift in policy, makes deficit reduction its first item of business. You can read the whole Cameron-Clegg announcement online, but the money quote, right from the top, speaks for itself:

The parties agree that deficit reduction and continuing to ensure economic recovery is the most urgent issue facing Britain. We have therefore agreed that there will need to be: a significantly accelerated reduction in the structural deficit over the course of a Parliament, with the main burden of deficit reduction borne by reduced spending rather than increased taxes; arrangements that will protect those on low incomes from the effect of public sector pay constraint and other spending constraints ... The parties agree that a plan for deficit reduction should be set out in an emergency budget within 50 days of the signing of any agreement; the parties note that the credibility of a plan on deficit reduction depends on its long-term deliverability, not just the depth of immediate cuts.

Give them credit: Greece this is not.