Those eager to see the federal and state governments dramatically downsized would do well to follow news from Great Britain in the coming weeks and months. Last week, that nation’s ruling coalition government announced its national budget would make deep spending cuts, as the nation faced one of the highest budget deficits in Europe, equaling about 11 percent of its economic output. The cuts are the deepest since the end of World War II, when Great Britain faced a war-devastated economy.
Britain’s proposed austerity budget comes on the heels of rioting in Greece and France as those nations try to institute strict spending diets. What will be especially interesting to watch is the effect Britain’s downsizing will have on the economy. Will it unleash a boom in the private sector, as supply-siders expect? Or will the drought in government spending deepen the recession’s hold?
On Oct. 20, Britain’s finance head George Osborne addressed Parliament to announce cuts in social safety net and pension benefits and the elimination of 25 percent of public sector jobs — 490,000 positions — during the next four years. The five-year austerity program, which includes $130 billion in spending cuts, should lead to reform of the nation’s welfare programs, government leaders argued. The plan even calls for cutting military spending by 8 percent; like its U.S. counterparts, the British Conservative Party is typically loyal to defense budgets.
“Today is the day when Britain steps back from the brink, when we confront bills from a decade of debt — a day of rebuilding when we set out a four-year plan to put our public services and welfare state on a sustainable footing for the long term,” Mr. Osborne said.
Like the U.S., Britain spent billions bailing out banks that faced collapse and doled out help for the swelling ranks of the unemployed.
What is worth following is the effect the cuts have on the British economy. Will 490,000 fewer paychecks stall any economic recovery? Will tighter welfare programs force more people into the job market, favoring employers to the point that wages drop? Or will a leaner, balanced budget loosen credit and other sources of money in the economy and cut the tax burden, spurring a period of growth?
Unlike the U.S. system, the ruling coalition government — the Conservatives, with the biggest bloc, and the third-place party, the Liberal Democrats — don’t have to win favor for their budget with the opposition Labour Party. If members of Parliament stay loyal to their party, it’s a essentially a done deal. So pay attention, tea partiers and progressives. Will the sky fall? Or will life continue, albeit in a manner leaner than Brits have come to expect? The answers may guide us as our policymakers on this side of the Atlantic ponder the way out of debt and recession.