Balancing the books
Balancing the books
To some the idea that Britain is a maverick may be a little hard to believe. The country that often seems to hark back to past glories might be an unlikely place to find radical policies and a government ploughing a path in a contrary direction to the prevailing consensus. Yet Britain has adopted a distinctly different approach to tackling its budget deficit. Different at least to some of its European and US peers
What the US and many European countries are putting off, Britain’s Coalition Government is embracing. The different path being followed is fiscal austerity. Where others are still committed to spending their way out of difficulty, here in the UK the new government has highlighted swift action in tackling the budget deficitas the primary objective of its tenure.
Now, most will have noticed that anything deemed too contentious has been ruled exempt from budget cuts and government spending will remain high for some years to come (even increasing until 2014/15), but it’s clear the role the state plays in employment and economic growth will shrink. If the Conservatives and Liberal Democrat parties have their differences they nonetheless share an ideological belief in a smaller government.
Most EU member states and the US recognise that they have to cut their budget deficits, but most (those who can) have put off the process until next year when they hope their own domestic economic recovery – and that of the world – will be more entrenched. The fear that cutting too soon will plunge an economy back into recession has lead many governments to continue with spending plans in an effort to stimulate their economies.
In the UK the government’s public sector spending currently amounts to a little over 45% of GDP (Gross Domestic Product). Just 10 years ago that figure was less than 35%.* The plans to cut around 25% from government spending by 2015 are ambitious. Previous bouts of peace time austerity have not been as savage. Even in countries like Canada and Sweden who have undertaken comparable public spending reductions, the speed of the reductions has not been so great.
While many countries are seemingly trying to keep their currencies under-valued, to boost their relative competitiveness, the UK’s fiscal tightening may well have the near term effect of strengthening sterling. This could be good for our own domestic inflation as it will lessen the effect of rising prices overseas impacting on the goods we buy here, but it will make our industries less competitive relative to many competitor countries.
Whatever happens there will be policymakers and financiers in America and Europe interested to see how the Coalition Governments experiment works out. Not to mention quite a few economists in years to come.
* HM Treasury (45.5%for 2010 estimate and 34.8% for 2000). GDP is nominal.