Austerity in Britain Compared with Austerity in US

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This article provides data on the early returns from the conservative governments plan in Britain to cut back on government spending during an economic downturn. Retail sales in March fell 3.5% which is the largest monthly decline in 15 years. Moreover, real household income is forecasted to fall 2% for the year. That will produce the worse consecutive decline in annual income in Britain since the 1930's. The loss of 300,000 government jobs will further exacerbate recovery in Britain.

The Conservative plan in Britain is based on a belief in the "confidence fairy". The assumption is that investors will believe that the government is on the path to fiscal sanity and reward the government with low interest rates. Interest rates in Britain compare favorably with those of Germany, which has the strongest economy in Europe. Its hard to imagine that the "confidence fairy' will do much better than that, although further deterioration in Britain's debt situation might cause investors to raise interest rates.

Comparing the austerity plan in Britain with the Ryan plan in the US leads to some interesting observations. The current government in Britain is the most conservative in Europe, yet it is to the left of the proposals in the Ryan plan and perhaps even to the left of the Obama plan. That is because the focus of the British plan depends on 75% of deficit reductions coming from spending cuts. The top marginal tax rate of 50% has not been reduced and the national health service structure has not been changed. The Ryan plan cuts spending by $5.8 trillion but this is offset by tax cuts, mostly for the rich, of $4.2 trillion. Moreover, the Ryan plan cuts government spending on healthcare by shifting the burden of rising costs to recipients. Neither party in the US is proposing any real increases in taxes. The Obama plan lets the tax cuts for the super rich expire under current law. The GOP, of course, has little interest in the current law and they regard the expiration as a tax increase.

Its also interesting to compare interest rates in the US with those in Europe. Investors have been willing to purchase US Treasury's with interest rates well below those in Britain and the rest of Europe. Its hard to see how the "confidence fairy" can do much better for the US. The US could grow its way out of its budget mess by taking the opportunity provided by low interest rates to invest in the economy. That would allow the US to focus on longer term plans to reduce the costs of providing healthcare.

I doubt that the GOP will discouraged by the results from Britain. It may be exactly what they want as the 2012 election approaches. If they win the election they will lose some of their interest in deficit reduction as they have in the past. The largest US budget deficits since WW II occurred under Reagan and Bush. They both cut taxes and increased spending. Obama's deficits are primarily due to the fall in tax revenue because of a weak economy. Total government spending in the US had not increased under Obama. Increases in federal spending have barely compensated for losses in state and local spending.