Is the UK just the visible part of the iceberg? Deep social changes might be underway

Cameron, the UK Prime Minister and Osborne, the Chanceler of the Exchequer have made a lot headlines with the new budget they just delivered: Cameron Betting on Prosperity From Austerity. We might be assisting in a major shift of perception, and to the greatest benefits of mankind, to the end of Keynesianism policies.

Here are two reports, from Bloomberg and NYT, which usually tend to be just adverts for Keynes destructive work. Both are now exposing the opposite view: that smaller government with less spending and borrowing and lower taxes are the solution. It also looks like Goldman Sachs finally undusted some history books from the late 1900s to discover those unbelievable ideas.

What an abrupt change for these mainstream media!
(Bloomberg) World leaders from the U.K.’s David Cameron to Naoto Kan of Japan are betting they can deliver fiscal austerity without derailing economic prosperity. History suggests they may be right.

Governments have proven they can spur expansion by focusing their belt-tightening on spending cuts rather than tax increases, according to studies by Harvard University professor Alberto Alesina and Goldman Sachs Group Inc. economists Kevin Daly and Ben Broadbent.

“There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it,” Alesina said in an interview. He made a presentation to European finance chiefs on the topic during their April meeting in Madrid.

Such a strategy in the past has also “resulted in significant bond and equity-market outperformance,” according to an April 14 Goldman Sachs report.
The key is an emphasis on cutting spending rather than raising taxes, said Goldman Sachs economists Broadbent and Daly in London. Lower spending means consumers and companies don’t fear higher taxes, so demand accelerates. A smaller public sector also helps reduce borrowing costs and makes economies more competitive as fewer government workers lighten labor expenses.

In a study of 44 large fiscal adjustments in 24 advanced economies since 1975, Broadbent and Daly discovered that reducing expenditures by 1 percentage point a year boosted average annual growth by 0.6 percentage point. Raising the ratio of taxes to GDP by the same margin cut growth by an average 0.9 percentage point.
Britain Unveils Emergency Budget
Some interesting facts from the following report:

  • UK has an estimate population of 62 million, yet 6 million public servants. 10% of the total population work for the government. You probably reach 20% if you remove the young and elderly. It means one out of  5!
  • Welfare budget of $285 billion, that's about $4,600 per person per year for a GDP per capita of $34,600!
  • Taxes are increasing, which is very bad for the economy, but at the same time, reducing the deficit and size of the state by 25% is massive.
  • Capital gains tax increase will definitely hurt the UK, but increasing VAT has the advantage of taxing consumption and fostering savings, which is badly needed.
  • All the measures contribute to increase the value of the GBP against all the rest of the deficit wasters. I expect the value of the pound to rise by more than the 2% that the VAT increase will cost us, so we might be better off after all.

NYT — Setting the scene for years of potential strife with the powerful public-sector unions and their allies in the Labour Party, Britain’s new coalition government on Tuesday unveiled the most severe package of spending cuts and tax increases since the early days of Margaret Thatcher’s era.

After only six weeks in office, the government of Prime Minister David Cameron took what his coalition of Conservatives and Liberal Democrats acknowledged was a historic gamble: that austerity measures will help balance the government’s books without pitching the country into a double-dip recession.

The cuts and tax increases, including average budget reductions of 25 percent for almost all government departments over the next five years, will make Britain a leader among European countries, including Ireland, Greece and Spain, competing to show they can slash spending and appease investors worried about surging debt. But the sharp reductions defy conventional economic wisdom, which holds that governments should increase spending to stimulate growth when the private sector is weak.

The steps outlined to the House of Commons by George Osborne, the chancellor of the Exchequer, would cut the annual government deficit by nearly $180 billion over the next five years, shrinking Britain’s public sector and instituting tough reductions in public housing benefits, disability allowances and other previously sacrosanct aspects of the country’s $285 billion welfare budget.

Only health and international aid spending would be protected from the 25 percent cuts for government departments by 2015, the steepest fiscal spending reductions since the 1930s. Mr. Osborne also announced a two-year wage freeze for all but the lowest paid among Britain’s six million public servants and a three-year freeze on benefits paid to parents for rearing children, in addition to new medical screening for people claiming disability benefits, part of a bid to cut $16 billion from the annual welfare budget.

Mr. Osborne also announced a raft of tax increases, though he was at pains to say that the government’s plan to sharply reduce the country’s $1.4 trillion national debt would rest on making roughly four pounds in spending cuts for every pound in tax increases, a point of considerable political weight in a country that is already among the highest-taxed in Europe.

The new taxes include an increase next year to 20 percent from 17.5 percent in the value-added tax on most goods and services, and an increase in the capital gains tax, to a new high of 28 percent, to curb what Mr. Osborne described as rich people in Britain “paying less tax than the people who clean for them.” At the same time, changes in income tax will remove nearly 900,000 of Britain’s poorest people from the income tax system altogether, and corporate taxes will also be reduced over a five-year period, to 24 percent from 28 percent.
Mr. Osborne, at 39 the youngest person in more than a century to preside over Britain’s public finances, said the cuts were made necessary by years of Labour profligacy. “We’ve had to pay the bills of past irresponsibility,” he said.


Dave Narby said...

Before this is all finished, governments will be reduced to an efficient size and power structure (more local, less central), finance will similarly be reduced in size and scope, and there will be a non-debt based global settlement currency.

pej said...

Let's hope you're right!