Jolly Old England Isn’t

For countries like Greece, austerity is about putting into place structures that really have never existed – like actually taxing rich people – even as the wealthy make sure their assets are well-ensconced far from the Aegean shores. For more entrenched economies, countries struggling with unmanageable debt face profoundly different choices. The litany of alternatives runs the gamut of higher taxes, fewer social benefits, higher retirement ages, deferred maintenance and the elimination or reduction of hitherto “meat and potatoes” government programs and public services… or increasing borrowings and M-1 (money supply – the governmental way of “printing money”) and face accelerating inflation.

England just elected a new government, and it is looking at its own crisis with a conservative approach. The pain that is about to be inflicted on everyday life in the U.K., now and for the foreseeable future, threatens to erode the social safety nets created in better times and impose new levels of taxation that will impact every soul in the country. It is interesting to watch our British friends, since their experiment and the results and consequences of their austerity efforts may well portend how the United States would do if it elected to apply the same measures. Some argue that Britain will kill what little spark of growth may exist by tightening the economic yoke and resulting in a resurgence of unemployment; others maintain that without debt reduction, the ability to achieve real growth over a longer period is not possible.

Let’s see what the new government is proposing, if they get their way. Taxes would be going up. Europe uses a value added tax (a giant sales tax - VAT) assessed at the central governmental level. England’s VAT, already a whopping 17.5%, would be raised to 20%. Capital gains rates would climb, and noting that the financial crisis was born in the financial sector, the new government is proposing a $2.9 billion assessment against the balance sheets of UK banks. While retirees would see increases in their pensions to mirror the cost of living, everyone else would be paying for the change.

The cuts that would run deepest, consistent with the new right-of-center Conservative Party government’s philosophy, are in social programs: “[Chancellor of the Exchequer George Osborne, the equivalent of a finance minister,] said Britain’s welfare costs had risen over the last 10 years to £192 billion from £132 billion (to $284 billion from $195.3 billion), an increase of 45 percent. He announced a three-year freeze on benefits received by parents for raising children, limits on subsidies for public housing and a new way of screening people receiving state benefits for disabilities. Promising accelerated efforts to raise the retirement age to 66, he said the measures would save £11 billion ($16.3 billion) in welfare spending by 2015.” New York Times (June 22^nd)

England hasn’t really faced cuts of this order of magnitude since the Margaret Thatcher government in the early 1980s, but times have changed. Critics have their doubts: “‘I think it will be a very hard sell,’ said David Kynaston, author of a recent social history of Britain in the austere 1940s. ‘It will only work if people see that the pain is equally inflicted. We are a very different society now — more individualistic and less willing to listen to exhortations.’”… ‘This is just right wing orthodoxy,’ said David Blanchflower, an economist at Dartmouth and a former member of the Bank of England’s monetary policy committee. ‘The patient is on life support now and if you take it off now you kill firms off and create a million unemployed workers. It is a classical policy mistake.’” The Times. Certainly, this will be a battle royal in Parliament, but whatever the results, undoubtedly, there are those in the United States ready to follow the same line. Our mid-term elections approach.

I’m Peter Dekom, and whatever the plan, in the U.K. or the U.S., there will be changes in governmental fiscal policies… big, big changes.