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As British Election Nears, Cameron Promises Another Dose of Austerity Cameron Promises Another Dose of Austerity
(about 11 hours later)
LONDON — The British election campaign now underway here revolves in large part around a single issue: the economy, and whether its rebound is the result of a budget-cutting austerity policy championed by the Conservative-led government, or in spite of it. LONDON — The British election campaign now underway here revolves in large part around a single issue: the economy, and whether its rebound is the result of an austerity policy championed by the Conservative-led government, or in spite of it.
Similar questions are being debated throughout Europe, but in the wake of the global recession after the 2008-9 financial crisis, few nations veered more sharply than Britain toward the theory that getting deficits and debt under control was a precondition to a sustained recovery.Similar questions are being debated throughout Europe, but in the wake of the global recession after the 2008-9 financial crisis, few nations veered more sharply than Britain toward the theory that getting deficits and debt under control was a precondition to a sustained recovery.
As the May election approaches, Prime Minister David Cameron is making the case that austerity worked — the economy is growing strongly and unemployment is down sharply — and promising an even tougher fiscal stance that would cut deeply into many government programs. As the May election approaches, Prime Minister David Cameron is making the case that austerity worked — the economy is growing strongly and unemployment is down sharply — and promising an even tougher fiscal stance that would slice deeply into many government programs.
His platform is being challenged by a broad spectrum of critics. The Church of England, for one, is urging more “moral authority” and criticizing inequality and low-paying jobs.His platform is being challenged by a broad spectrum of critics. The Church of England, for one, is urging more “moral authority” and criticizing inequality and low-paying jobs.
But the campaign is also focusing attention on key elements of the economic debate: How much austerity did the government actually impose? Is Britain’s recovery a victory for budget cutting, or evidence that the country pulled out of its slump through continued if somewhat lower deficit spending combined with an aggressive effort to keep interest rates low?But the campaign is also focusing attention on key elements of the economic debate: How much austerity did the government actually impose? Is Britain’s recovery a victory for budget cutting, or evidence that the country pulled out of its slump through continued if somewhat lower deficit spending combined with an aggressive effort to keep interest rates low?
Despite tough talk from Mr. Cameron and George Osborne, the chancellor of the Exchequer, the British government continues to spend much more than it takes in and to accrue more debt. Its budget deficit of 5.5 percent of gross domestic product is considerably higher than that of the supposedly spendthrift Socialist government of France. Despite tough talk from Mr. Cameron and George Osborne, the chancellor of the Exchequer, the government continues to spend much more than it takes in. Its budget deficit of 5.5 percent of gross domestic product is considerably higher than that of the supposedly spendthrift Socialist government of France.
Mr. Osborne has failed to deliver on two key promises made when he and Mr. Cameron took office five years ago at the head of a coalition with the Liberal Democrats — to run a cyclically adjusted balanced budget by this year and to begin to shrink Britain’s cumulative government debt.Mr. Osborne has failed to deliver on two key promises made when he and Mr. Cameron took office five years ago at the head of a coalition with the Liberal Democrats — to run a cyclically adjusted balanced budget by this year and to begin to shrink Britain’s cumulative government debt.
“By historical standards this has been significant austerity,” said Paul Johnson, director of the Institute for Fiscal Studies, an independent, nonpartisan research institution that calculates the costs of political promises. “But despite the rhetoric, it’s not a massive austerity, not compared to Ireland, Spain or Greece.” “By historical standards this has been significant austerity,” said Paul Johnson, director of the Institute for Fiscal Studies, a nonpartisan research institution that calculates the costs of political promises. “But despite the rhetoric, it’s not a massive austerity, not compared to Ireland, Spain or Greece.”
Mr. Osborne, he said, has “not been quite such an austere chancellor as either his own rhetoric or that of his critics might suggest.”Mr. Osborne, he said, has “not been quite such an austere chancellor as either his own rhetoric or that of his critics might suggest.”
Still, real spending by government departments is down 8 percent from 2010, when the budget deficit was more than 11 percent of G.D.P., a function of the Labour government’s response to the global crash of 2008.Still, real spending by government departments is down 8 percent from 2010, when the budget deficit was more than 11 percent of G.D.P., a function of the Labour government’s response to the global crash of 2008.
But because the economy did not grow as much as forecast, limiting tax revenue, the deficit did not fall as much as planned. After 2012, the government chose not to repress economic growth any further by sticking to its targets, postponing them to a potential second term. Yet because the economy did not grow as much as forecast, limiting tax revenue, the deficit did not fall as much as planned. The government made important reductions, delivering most of the cuts it promised. But those cuts mostly took place in the first two years, until 2012. As economists on both sides point out, the government eased off sharply after that. Austerity was essentially put off — to a potential second term.
The government made important reductions, delivering most of the cuts it promised. But those cuts mostly took place in the first two years, which set the criticism of the government in stone. As economists on both sides point out, the government eased off sharply after that. Austerity was essentially put on pause.
“They were faced with a choice — to stick to the austerity plan, or to do something economically more sensible — and they chose the latter,” said Jonathan Portes, director of the National Institute of Economic and Social Research. “Though I’m not a great fan of this government, they made the right choice, and by comparison to what happened in the eurozone, everyone looks good.”“They were faced with a choice — to stick to the austerity plan, or to do something economically more sensible — and they chose the latter,” said Jonathan Portes, director of the National Institute of Economic and Social Research. “Though I’m not a great fan of this government, they made the right choice, and by comparison to what happened in the eurozone, everyone looks good.”
In that sense, Mr. Cameron and Mr. Osborne have threaded the needle, cutting enough at the start to keep bond holders and core constituents happy, but at the same time, benefiting from a Keynesian recovery, fueled by deficit spending, while making the moral and ideological case that they are reducing the deficit over time.In that sense, Mr. Cameron and Mr. Osborne have threaded the needle, cutting enough at the start to keep bond holders and core constituents happy, but at the same time, benefiting from a Keynesian recovery, fueled by deficit spending, while making the moral and ideological case that they are reducing the deficit over time.
It is what one Conservative politician, who spoke on the condition of anonymity given the election, called “political shadow boxing.” Whatever the cuts so far, Mr. Osborne has vowed to swing a much broader ax to chop back the size of the state, renewing the Thatcher-era belief that a large state sector is wasteful and stifles creativity.
Whatever the cuts so far, Mr. Osborne has vowed to swing a much sharper, longer ax to chop back the size of the state, renewing the Thatcher-era belief that a large state sector is wasteful, limits enterprise and stifles creativity. Mr. Osborne vows that his last budget before the election, to be delivered Wednesday, will contain “no giveaways, no gimmicks.” He has promised an absolute budget balance by 2019, including investment spending, and a 1 percent surplus by 2020, which will mean a spending cut by government departments of 14 percent in real terms, some 38 billion pounds, over the next five years, a reduction on a scale never before seen.
With Mr. Osborne preparing his last budget before the election, to be delivered Wednesday, Mr. Johnson said that what the Conservatives are proposing will be the most stringent cost-cutting in modern times. According to Mr. Johnson, Mr. Osborne, by 2019, would bring the state’s share of the economy to its lowest since World War II.
Mr. Osborne said the budget would have “no giveaways, no gimmicks.” He has promised an absolute budget balance by 2019, including investment spending, and a 1 percent surplus by 2020, which will mean a spending cut by government departments of 14 percent in real terms, some 38 billion pounds, over the next five years, a reduction on a scale never before seen. The impact, if the budget is adopted, would be substantial. While promising to cut some taxes and protect politically sensitive things like pensions and the National Health Service as well as foreign aid, Mr. Osborne will have to make disproportionate cuts in defense, policing and local government, hard choices in a time of renewed anxiety about security.
His opponents charge that he would reduce government spending to around 35 percent of G.D.P., the same level as in 1938, before the collapse of the empire and the creation of the National Health Service. “Much low-hanging fruit has already been plucked,” said Ryan Bourne, head of public policy at the right-leaning Institute of Economic Affairs. In his coming budget, Mr. Osborne may use the extra economic growth and the tax revenue it has produced to soften his targets slightly, especially with key Tories pushing to preserve military spending at 2 percent of G.D.P., the NATO guideline.
Mr. Johnson says that 1938, when the state spent about 25 percent of its budget on defense, is a bad analogy, but by 2019, he said, Mr. Osborne would bring the state’s share of the economy to its lowest since World War II.
The impact, if the budget is adopted, would be substantial. While promising to cut some taxes and protect spending on politically sensitive matters like pensions and the National Health Service, which is still free to patients at point of use, as well as foreign aid, Mr. Osborne will have to make disproportionate cuts in defense, policing and local government, hard choices in a time of renewed anxiety about security.
“Much low-hanging fruit has already been plucked,” said Ryan Bourne, head of public policy at the right-leaning Institute of Economic Affairs. “The next government will find itself with much more difficult choices about where the ax will fall.”
In his coming budget, Mr. Osborne may use the extra economic growth and the tax revenue it has produced to soften his targets slightly, especially with key Tories pushing to preserve military spending at 2 percent of G.D.P., the NATO guideline.
But he will not have much room to maneuver, since he has insisted that he will reach his goals through spending cuts, not tax increases.But he will not have much room to maneuver, since he has insisted that he will reach his goals through spending cuts, not tax increases.
“If you really do that,” Mr. Johnson said, “then the rhetoric begins to match the reality, because you really are beginning to shrink the state.”“If you really do that,” Mr. Johnson said, “then the rhetoric begins to match the reality, because you really are beginning to shrink the state.”
But he said he has his doubts, adding: “The size of the cuts in the nonprotected parts of the budget would be so high I’d be astonished if this happens.” Polling suggests it is unlikely that the Conservatives will win an overall majority in Parliament, even if Mr. Cameron is re-elected prime minister, limiting their ability to enact their agenda. He added that he has his doubts: “The size of the cuts in the nonprotected parts of the budget would be so high I’d be astonished if this happens.” Polling suggests it is unlikely that the Conservatives will win an overall majority in Parliament, even if Mr. Cameron returns as prime minister, limiting their ability to enact their agenda.
The Labour Party has been vaguer about its economic plans, while generally committing itself to limit deficits and slow the increase in the public debt. But Labour is in no hurry to get started.The Labour Party has been vaguer about its economic plans, while generally committing itself to limit deficits and slow the increase in the public debt. But Labour is in no hurry to get started.
Mr. Johnson’s institute published a “green budget” comparing the economic plans of the main parties. The differences are clear when it comes to the size of the government, with Labour projecting much less drastic spending cuts of roughly £9 billion over the next five years, less than a quarter of Tory plans.Mr. Johnson’s institute published a “green budget” comparing the economic plans of the main parties. The differences are clear when it comes to the size of the government, with Labour projecting much less drastic spending cuts of roughly £9 billion over the next five years, less than a quarter of Tory plans.
Labour promises a balanced budget on everything except investment in infrastructure, for which Labour would continue to borrow, only by 2020.Labour promises a balanced budget on everything except investment in infrastructure, for which Labour would continue to borrow, only by 2020.
The Conservatives are playing on voters’ mistrust of Labour’s economic management. They argue that with lower oil prices, stronger demand, lower inflation, more jobs, seven consecutive quarters of growth, and growth of about 3 percent last year, the economy in fact looks pretty good and is getting better, so why let Labour mess it up again? The Conservatives are playing on voters’ mistrust of Labour’s economic management. They argue that with lower oil prices, stronger demand, lower inflation, more jobs, seven consecutive quarters of growth, and growth of about 3 percent last year, the economy looks pretty good, so why let Labour mess it up again?
In fact the economy has significant problems, with G.D.P. per capita and real wages still lower than they were before the 2008 economic crisis, though household incomes have finally reached the 2008 level. Living standards are down, especially for young people who are getting lower pay and a smaller share of social benefits than their parents. Labor productivity is poor, and Britain is still running a large structural deficit, another indication that austerity has been much milder than in Ireland or Greece. In fact, the economy has significant problems, with G.D.P. per capita and real wages still lower than they were before the 2008 economic crisis, though household incomes have finally reached the 2008 level. Living standards are down, especially for young people who are getting lower pay and a smaller share of social benefits than their parents. Labor productivity is poor, and Britain is still running a large structural deficit, another indication that austerity has been much milder than in Ireland or Greece.
What took everyone by surprise, given the slow turnaround in the economy, has been the rebound in job creation, with unemployment now at 5.8 percent, down from 7.9 percent when the government took office. But because most of the new jobs are either part-time or not highly paid, they have produced less tax revenue and less of a boost to the economy than the government expected. What took everyone by surprise, given the slow turnaround in the economy, has been the rebound in job creation, with unemployment now at 5.8 percent, down from 7.9 percent when the government took office. Yet because most of the new jobs are either part-time or not highly paid, they have produced less tax revenue.
With interest rates so low, many economists say it is wrong to worry about adding modest amounts of new debt and to insist on fiscal tightening that risks the fragile economic recovery. After all, it is economic growth that increases tax revenue and economic output, which brings down the percentage of the economy that debt represents. With interest rates so low, many economists say it is wrong to worry about adding modest amounts of new debt and to insist on fiscal tightening that imperils the fragile recovery. Yet those who want to push down the debt now argue that if interest rates go up to traditional levels, servicing an increasing amount of debt will be extremely painful.
But those who want to push down the debt now argue that if interest rates go up to traditional levels, servicing an increasing amount of debt will be extremely painful. Mr. Johnson said that the cutbacks so far had encouraged the Treasury to push for more. “We got here with a lot less pain than I and others expected in 2010,” Mr. Johnson said. “It’s possible to rein in spending without things falling apart.” At least so far.
Mr. Johnson said that the spending cuts so far had encouraged the Treasury to push for more. “We got here with a lot less pain than I and others expected in 2010,” Mr. Johnson said. “It’s possible to rein in spending without things falling apart.” At least so far.