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UK Budget Cuts: Timing, Scale Debated, But Not Principle

October 20, 2010 at 12:00 AM EDT
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In light of the UK's new austerity measures, Jeffrey Brown gets two perspectives about Britain's financial future with Ned Temko of The Observer and The Economist's Zanny Minton.
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JEFFREY BROWN: And for more on all this, we turn to Ned Temko in London. He’s a writer for the British paper The Observer and recently completed a book on British politics. And here in Washington, Zanny Minton Beddoes is economics editor at “The Economist” magazine.

Ned Temko, to you first. The new coalition government had said it was going to take strong action, but did the size and scope still jar people there?

NED TEMKO, The Observer: I think it was incredibly dramatic, even though a lot of it had been trailed ahead of time, simply because of the scale of it.

It amounted to something like 83 billion pounds in total of spending cuts, the equivalent of something like $135 billion or $140 billion, which, by some distance, is the largest such package since the Second World War. So, it made a huge impact.

And it has, predictably, set off a fairly huge political debate.

JEFFREY BROWN: And just staying with you, Ned, what jumps out at you in terms of the — where the impact will be felt most? Or is this just across the board for British society?

NED TEMKO: Well, it’s a great question, because, on the surface, the main target is welfare payments, local government, crucially, areas where poorer families stand to be hit hardest.

But, because of the politics of all this, the government was careful to try and spread the pain, if you will. So, for instance, in tomorrow’s newspapers here, which have already — the first editions of which I have already seen, The Daily Telegraph, traditionally pro-Conservative, leads on pain for the middle classes, while The Guardian, which is left-of-center, says, the axe falls on the poor.

So, the real problem in the short term for the government is that a package of this scale and breadth is going to be felt to some extent across the board.

JEFFREY BROWN: Zanny Minton Beddoes, what is your take on — first, broadly speaking, just where do you see the impact and the scale here?

ZANNY MINTON BEDDOES, The Economist: Well, you know, Ned is absolutely right. The scale is extraordinary. This is, by some distance, the biggest package of spending cuts since the Second World War. It’s much more ambitious than anything Mrs. Thatcher attempted, you know, the Iron Lady®MD-BO¯.

It’s going to change the scope of British government. The question of whether it will — whether the government can kind of improve the efficiency — its efficiency, to boot, is not clear yet. But, in the longer term, it’s clearly going to change the scale and scope of British government.

But I think, in the short term, a second question is, what it’s going to do to the still-weak recovery? I mean, the U.K. economy is still recovering from what was a very, very deep recession. And, in the short term, this kind of fiscal austerity, this kind of tightening at this scale and this scope, will that — will the economy be able to stand it, or will it push it back towards recession?

JEFFREY BROWN: Well, I mean, this goes to the economic debate, right, behind this. Now, what’s the government’s calculation here in making such deep moves?

ZANNY MINTON BEDDOES: Well, the government’s economic calculation is that Britain had no choice, and that Britain was teetering, they think, on the edge of bankruptcy.

The fiscal crisis in Greece earlier this year had a profound impact on British politics and British politicians. And there was a very fear that Britain could go the same route, that the bond markets could revolt, and Britain could face a really serious fiscal crisis.

And, in fact, the chancellor today said, today is the day Britain steps back from the brink. There’s a very real sense that this is — this medicine is absolutely necessary to pull Britain out of a fiscal crisis.

JEFFREY BROWN: He put in the very stark terms, didn’t he? Yes.

ZANNY MINTON BEDDOES: Now, whether that’s true or not is debatable.

And, certainly, on the other side, the opposition regards this as grossly irresponsible. They say it’s an irresponsible way to go, when the economy is so weak.

JEFFREY BROWN: Because — and that’s the — and spin that out a little bit — the economic argument. And we heard in this country, we heard around the world, this isn’t the time to be doing this kind of thing, right?

ZANNY MINTON BEDDOES: Absolutely. Well, if you remember, when the — all the economies of the world, essentially, the rich world, fell into this deep recession, we reacted with Keynesian stimulus.

The appropriate medicine was for the government to boost spending, to cut taxes, to run a bigger deficit, because as the private sector, as private individuals were trying to save more, the government prevented the recession from getting too deep by stepping in. And the question now is, everyone agrees, I think, even in this country — well, this country hasn’t had the debate really yet — but most people agree that, in the medium term, governments need to cut back.

But the question is, is the recovery strong enough to do that right now? Is now the time to start austerity? And how much austerity can the economy stand right now?

JEFFREY BROWN: Well, Ned Temko, we see what’s going on in — across the channel in France with demonstrations.

How much debate, how much opposition is this debate — this economic debate, we’re talking about — how much is that playing out and how loud is it there?

NED TEMKO: Well, it’s not anywhere near as loud as in France, because the British don’t have the French tradition of sort of going out on the streets and burning down barriers and things like that.

And it’s not the British way to do things. And I don’t think that’s the expectation here. I think your question is absolutely opposite, however, because the political debate is heating up, and the opposition is making exactly the argument you have just heard. And that is that this is a dangerous step, that it could vault the British economy back into recession, the famous double-dip recession.

And what the government is counting on is that the — is two things, first of all, the economy is growing strongly enough, and, second of all, that the private sector will create enough jobs, there will be enough economic activity to take up the slack of job losses in the public sector.

And they’re playing a long game, and they’re calculating that, before the next election, things will be back on an even keel, and, crucially, making the political argument that Labor wouldn’t do anything differently, because, after all, Labor has — had committed itself to broadly attacking the deficit, public debt. And so they are in a difficult position, because they’re arguing about timing and scale, and not about the principle.

JEFFREY BROWN: And, Zanny, just to be — just to help explain this vis-a-vis American politics, the British government can do this on its own, basically, right, because of the parliament system?

ZANNY MINTON BEDDOES: Absolutely. It’s very useful at times like this to have a parliamentary system.

I mean, in the U.K., the budget and now the spending review is really a blueprint. It’s a blueprint for action. And, here, the president’s budget is essentially the sort of opening gambit in a long discussion, and what emerges from Congress may be something completely different. That’s a very, very different kind of system.

So, here, it’s almost unimaginable to have the kind of drama that you would have had today. I think it’s actually not just that that’s leading us to such a different situation right now. I think, in the U.S., there’s much less concern even about the medium term, and, probably with reason, less concern about the short term, too.

So the U.S. fiscal debate, there’s much more debate about what needs to be done. You have on the Republican side an unwillingness to countenance tax increases. Democrats don’t want to cut spending. The U.K. debate, I think, has had much more coalescing about what needs to be done. And, as Ned said, it’s really about the scale and pace that the argument…

JEFFREY BROWN: Well, if you think about what they did in Britain today in the U.S., I mean, what would that mean in terms of jobs, in terms of — I don’t want to put you on the spot, to actually calculate it, but we’re talking about huge…

ZANNY MINTON BEDDOES: Well, just let me give you examples of what they actually laid out today.

They laid out spending cuts. The Defense Department, the British defense budget is going to be cut by 7.5 percent, the Home Office, which runs prisons, 25 percent cuts, huge, huge, huge cuts that I think are almost unimaginable in this country.

And the overall fiscal austerity plan in Britain, which is both tax increases and spending cuts — and the — George Osborne wants to have about 80 percent of his fiscal tightening come from spending cuts, but they’re also going to increase taxes. They’re increasing VAT, for example, next year. Both of those, the scale of the spending cuts and the tax increases, seem to me to be kind of unimaginable right now in the U.S.

JEFFREY BROWN: And, Ned, I’m — finally, I’m just curious how, to the extent that this is an international argument and one that plays out over here, how much commentary is there in Britain looking across at us, you know, and sort of saying, while they’re doing this, we’re going to go our own way? Is that part of the discussion over there as well?

NED TEMKO: It has been, less so now, because there is this consensus pretty much that something has to be done.

But, certainly, it was a debate at the time of the election, because the previous government and the previous prime minister, Gordon Brown, was very much on the same page as first George W. Bush and then Barack Obama on the need, as your other guests said, for strong Keynesian stimulus, when the entire financial system internationally seemed on the brink of collapse, whereas, in the last two or three months, certainly since the election, it’s been clear that the British debate has diverged from that in the United States, and that even the Labor opposition, with few exceptions, doesn’t argue any longer that you need a purely Keynesian response.

There are voices within Labor who still believe that, but the people who are on the front bench, that is, the leader of the opposition and the shadow chancellor, are pretty much on board with the need at some stage to confront the deficit as a priority.

JEFFREY BROWN: All right, Ned Temko in London, Zanny Minton Beddoes here, thank you both.

ZANNY MINTON BEDDOES: Thank you.