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Deficit versus growth – the Chancellor’s big gamble

The proposed cuts in public spending announced by British Chancellor George Osborne are unprecedented in recent memory, as is the depth of the recession. All agree, something had to be done, but will the massive cutbacks pay off?

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Following the announcement of UK Chancellor of the Exchequer (finance minister) George Osborne’s “bloodbath budget”, Britain has reacted with cautious optimism and an underlying tone of fatalism: something, after all, had to be done.
 
Osborne’s message to the House of Commons on Tuesday was clear: Britain will endure massive spending cuts and some very significant tax hikes in order to eradicate its crippling deficit (10 percent of GDP).
 
“The coalition government believes that the bulk of the reduction must come from lower spending rather than higher taxes,” Osborne stated. “The country has overspent; it has not been under-taxed.”
 
Some 23 percent of the savings will come through tax increases, including a rise in Value Added Tax (VAT) to 20 percent and an increase in capital gains tax for the wealthiest to 28 percent. The rest of the savings will come from harsh cuts in public spending.

Observers in other countries who face comparable deficit crises and challenges will certainly follow the developments in the UK with interest. They will want to see if the Osborne gamble pays off, and if it’s a model worth betting on.

Gambling with economic growth

Osborne’s big challenge is the maintenance of economic growth despite the huge 25 percent cut in public spending by 2015.

“Labour lost its way as custodian of the public sector,” says Simon Jenkins in the left-leaning Guardian newspaper, calling Osborne’s budget a gamble. If it works, Jenkins admits, it will be Thatcherism’s (small government, low taxes, incentives to the private sector) finest hour –a bitter pill for the British left to swallow.
 

But Jenkins warns: “Expecting the public sector to spend a quarter less by 2015 without jeopardising the overall prosperity of the country requires an impressive leap of faith in the recuperative powers of the private sector – for which there is little evidence outside the much-abused financial sector.”
 
Public sector and benefits claimants brace for the worst

In terms of welfare, cuts worth 11 billion pounds (13 billion euros) will see child benefits frozen for three years, with maximum limits imposed for housing benefits and a tougher assessment for disability allowance. Public sector salaries will be frozen for two years.

Calling the budget “a Dickensian move”, left-wing tabloid the Mirror headlined: “Osborne picks on kids and poor families.”
 
In the same paper, columnist Kevin McGuire saw elements of the Thatcherite credos between the lines of the budget speech: “Growth down and unemployment up, living standards falling and unfairness rising, taxes up and public services ruined are the policies of a tinpot Chancellor treating Britain as a laboratory to re-test failed right-wing economics. To target the poorest and most vulnerable in our country is to worship the politics of unfairness.”
 
The outside view

Not everyone, however, is convinced that cuts in public spending are a recipe for disaster. Some international observers hope the Osborne gamble will work and become a beacon for change elsewhere.

Respected French financial daily Les Echos points out that US President Barack Obama had asked G20 ministers to prioritise growth over deficit reduction to safeguard the global recovery.

Les Echos columnist Nicolas Barré writes: “Cameron’s government has done exactly the opposite, in the firm belief that this is the only way to fix [Britain’s] economy in the long term.

“How well thought-out is this gamble? In France, we have seen that 30 years of deficits and growing public debt has bought not more, but less growth,” argues Barré. “The success or failure of the British experience will be instructive.”

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