Britain's budget cuts outline radical path toward smaller government

Britain announced deep and wide-ranging budget cuts today that aim to eliminate its $245 billion deficit over the next five years.

Britain’s deepest cuts in public expenditures since World War II were unveiled today in a five-year plan to clear its deficit and lay the foundation for a radical transformation of the state.

After months of preparing citizens for the worst, the coalition government unveiled cuts of 19 percent on average across most departments. The ax will fall particularly hard on welfare benefits, and the government plans to raise the retirement age from 65 to 66. Only a few priority areas are being shielded, such as the iconic National Health Service (NHS).

The actions – designed to allow the government to start paying back debts that are expected to reach $1.4 trillion (70 percent of GDP) in the next few years – split economists. Some laud them as boldly instructive for debt-stricken nations elsewhere, while others warn that the cuts could tip the UK’s fragile economy back into recession.

“Today is the day when Britain steps back from the brink, when we confront the bills from a decade of debt,” said Chancellor of the Exchequer George Osborne, who has consistently used Greece’s debt crisis as an example of what awaits if the UK’s deficit is not urgently tackled. “It is a hard road, but it leads to a better future.”

Alongside $45 billion in tax hikes over the next five years, Mr. Osborne expects that $125 billion in cuts over the same period will eliminate Britain's $245 billion deficit.

Social welfare hit hard

The four-month-old coalition government of the Conservative Party and Liberal Democrats is staking its future on hopes that the private sector will pick up the slack from the cuts – and give jobs to thousands of out-of-work state employees.

But Kitty Ussher, a former minister in the previous Labour government who now directs the left-of-center think tank Demos, says that the depth of the cuts heralded grave dangers at a time when many fear Britain could be at risk of another recession.

“I think the risk of that happening has increased in the last month,” she says. “It looked for example like consumer confidence was feeling quite buoyant in early summer, but the most recent indicators are that that has dropped off substantially.”

“House prices are looking a bit wobbly and crucial economic indicators from forecasting companies have nosedived recently,” says Ms. Ussher.

While social welfare took the brunt of the cuts, few areas of life in the UK will remain untouched by today’s announcement, including institutions such as the BBC. The queen will reduce spending by 14 percent in 2012/13, a $7.8 million drop.

The Home Office and Ministry for Justice – departments that oversee policing and prisons – were among the biggest losers, confronting cuts of as much as 23 percent over four years. The budget of the Home Office for counterterrorism policing will fall by 10 percent over the next few years.

A lesson for other troubled economies?

While echoing the draconian austerity of neighboring Ireland, Britain’s approach sets it apart from other major economies like France and Germany, who have public debt similar in size to the UK's but are pursuing very different policies.

Britain’s retreat from Keynesian policies now forms the battleground between economic theorists at large. In the pages of the Financial Times, Martin Wolf noted the absence of any similar reining in of government spending in the US, saying that the British policymaking elite had been “shocked into sobriety” by crisis that still threatens on the Continent to rip apart the divergent economies in Europe’s common currency "eurozone."

“What we do know is that the UK has launched a remarkable policy experiment,” he added. “The contrast with the US should at least be instructive.”

From the other side, US economist Joseph Stiglitz used an article in The Guardian to warn Britain – and the world – against retreating from the policies that were deployed at the peak of the 2008 financial crisis following the collapse of Lehman Brothers, arguing that what was needed now was more stimulus, not less.

“Britain is embarking on a highly risky experiment. More likely than not, it will add one more data point to the well- established result that austerity in the midst of a downturn lowers GDP and increases unemployment, and excessive austerity can have long-lasting effects,” he wrote. “Austerity is a gamble which Britain can ill afford.”