Tuesday, June 22, 2010

United Kingdom Joins Austerity Parade

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I've said over the past few years the country to watch for Americans is not Japan, but Great Britain aka the mini U.S.  While there are some differences, both have their own currency, both are running big deficits, both have oodles of debt to deal with, both have engaged in monetary debasement (i.e. quantitative easing) to 'solve problems', along with obviously similar banking systems and the cultural worship of the banker (at least until 3 years ago).  While more 'socialistic' the key difference economically is the benefit of the reserve currency that the U.S. has.  No such ace in the hole for the UK.  Japan, on the other hand, has a much greater debt load as % of GDP, but almost all internally financed, whereas the UK relies much more on the kindness of strangers, as does the U.S. hence why a better country to follow for 'canary in the coal mine' reasons.

Unlike Americans who in a vague sense want to 'cut the deficit' but only if it does not affect any program they are specifically benefiting from (i.e. Tea Party - tell government to get out of my life! But don't you dare touch my Medicare & Social Security benefits!), the Brits recently elected leaders who vowed they would push through some tough reforms to bring down their deficit.  In the States, New Jersey might be a test case of similar measures - a governor who was elected on a mandate and is taking specific actions - whatever the effect on his popularity. [Feb 18, 2010: [Video] NJ Governor Chris Christie Talks Tough on Out of Control Spending, with Some Shocking Statistics]  I assume seeing the fear and mayhem weaving through their European neighbors (who are stuck with a currency that cannot be printed from thin air to 'solve problems') probably helped push the issue.  Compare and contrast what you see below with America which is still forming 'committees' to look at the deficit issue while continuing to spend like drunken sailors.

Overnight we have the initial plan from the UK on how they plan to attack their yawning deficits - let's see what the specifics are.  Somewhere "Spend it like Beckham" Paul Krugman must be throwing a fit over these ideas.

Via AP:
  • Britain announced the toughest cuts to public spending in decades and new tax rises on Tuesday in an emergency budget aimed at sharply reducing the country's record debts.  The pain fell on shoppers who will be paying higher sales tax, wealthy people who will be hit for higher capital gains taxes, and banks targeted by a new levy. Even Queen Elizabeth II, who accepted a freeze in her support from taxpayers, will feel the pinch.  There was good news for business, who will benefit from a cut in corporation tax from 28% to 24% over four years.
  • Treasury chief George Osborne told the House of Commons his program would allow the country's new government to cut borrowing from about 10% of gross domestic product to 1% within its 5 year term of office.  (to contrast the U.S. is well into double digits and BEST CASE scenario if the economy comes roaring back is aiming for 6% deficits later in the decade)
  • "Adding the new measures to the previous government's plans points to a total fiscal tightening of over 6% of GDP over the next five years, the bulk of which -- 77% -- will come from real spending cuts," Loynes said. (unthinkable in U.S.)


Via Bloomberg:
  • U.K. Prime Minister David Cameron's government will impose a levy on banks and raise the sales tax in the biggest budget-deficit cuts in a generation, seeking to guard the top credit rating without stifling economic recovery. 
  • Chancellor of the Exchequer George Osborne announced a freeze on public workers’ pay (we've seen either freezes or reduction in public workers' pay across Europe, while the U.S. continues spending on public workers as if there never was any recession nor a deficitand subsidies for children along with a reduction in housing benefits. Capital- gains taxes were raised and corporate-profit taxes cut.  
  • The majority of government departments face budget cuts of 25%  (again, unthinkable in the U.S.)
  • “This is the unavoidable budget,” Osborne told lawmakers today in London, delivering the package six weeks after taking over. “Everyone will be asked to contribute.”  Osborne is aiming to cancel a deficit that reached 11% of gross domestic product in the last fiscal year.
  • The pound and gilts rose as Osborne announced the plan would eliminate the structural deficit by 2015, with net debt peaking at 70% of gross domestic product by 2014. He rejected suggestions the government needed to choose between growth and fiscal order as a “false choice.”  (I'm sure the Keynesians in the White House - i.e. everyone - were incensed to hear this)

Details:
  • Overall, he said spending would be cut by 30 billion pounds ($44.4 billion) a year, including 11 billion pounds from welfare, while the increase in value-added tax to 20% in January from 17.5% would yield 13 billion pounds a year by the end of the Parliament in 2015. (be very afraid of a VAT coming to the U.S. during this decade)  [Dec 11, 2009: NYT - Many See VAT Option as a Cure for Deficits] Essentials including food, children's clothing and books will remain exempt.
  • The levy on banks would tax their balance sheets starting next year, generating 2 billion pounds of revenue. The tax will be set at 0.04% in 2011, before increasing to 0.07%. The levy will apply to British banks as well as the subsidiaries and branches of overseas banks. Firms will only be liable for the levy when their relevant aggregate liabilities exceed 20 billion pounds. (if done in the U.S. the dogmatic claims would be this would 'restrict capital')
  • Pledging to bolster investment and employment, the government put the corporate tax on a slide to fall four percentage points to 24% over four years (U.S. GOP would like this) and raised the threshold at which employers start paying national insurance. 
  • .... announced a rise in capital gains tax, from 18% to 28%.
  • To blunt the impact of the cuts and convince voters that ordinary Britons won’t suffer unduly, Osborne raised the ceiling at which the lowest rate of income tax is levied by 1,000 pounds to 7,475 pounds, exempting 880,000 low earners from payment. He also maintained spending on schools, hospital buildings and other infrastructure projects.  
  • Policy makers say a Greek-style bondholder revolt is a bigger risk to the economy than a return to recession and that restoring order to the public balances will ultimately boost the economy.  “The crisis in the euro-zone shows that unless we deal with our debts there will be no growth.” 

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