U.K. Embraces Austerity
LONDON—In a bold gambit to tackle its record debt, the British government detailed sweeping spending cuts Wednesday that will hit everyone from welfare recipients to the Queen, positioning the U.K. as a global test case in the argument for choosing austerity over stimulus to repair the economy.
Treasury chief George Osborne detailed the £81 billion ($127 billion) in spending cuts over four years that will help pare a budget deficit of £155 billion. The steep cuts are a gamble that weaning the U.K. off robust public spending will keep lending costs low—and therefore reinvigorate the private sector without undercutting the country's sluggish recovery from the recession and financial crisis.
"Today's the day when Britain steps back from the brink, when we confront the bills from a decade of debt," Mr. Osborne told the U.K. Parliament.
The cuts are expected to spark more of the joblessness and economic pain being felt throughout Europe. In France, President Nicolas Sarkozy sent police to clear blockades of refinery workers, whose strikes over a proposed pension overhaul have left nearly half of the country's gas stations dry. In Spain on Wednesday, the austerity push of Prime Minister José Luis Rodríguez Zapatero led him to shut down two ministries.
The U.K.'s Mr. Osborne calculated that average cuts to government departments will be 19% over the next four years, rather than the 25% he had previously predicted. That took some wind out of opposition criticism in the U.K. The Labour party has warned of cutting spending too quickly, but even its calculations imply 20% cuts.
- Full Text: Osborne Speech
- Spending Review Documents
- Table: How Each Department Fared
- LIVE: @IAINMARTINWSJ Tweets the Review
- Agenda: Still a Long Way to Go
- Marketbeat: Pound, Gilts Hold Steady
- Cameron Unveils U.K. Defense Cuts
- U.K. Banks Face 'Growing' Tax Hit
- U.K. Public-Sector Borrowing Rises Steeply
But the U.K.'s five-month-old coalition government, led by Prime Minister David Cameron's Conservative Party, will find plenty of opposition to its plan abroad, especially in the U.S. The U.K.'s aggressive spending cuts mark a fiscal policy experiment at a delicate moment for the global economy. Economists have argued for more than a half century about the proper role of government in combating recession. Today, the world's largest economies are going in different directions.
President Barack Obama and his advisers—stocked with the intellectual heirs of British economist John Meynard Keynes, who argued for government deficit spending to replace missing private-sector demand in a downturn—have acknowledged a need for deficit reductions in the long-run. But the U.S. has urged European nations not to rein in their spending too aggressively now, for fear it could tip the global economy back into recession.
Europe has so far ignored the call. Austerity has become the watchword on the continent, from weak economies such as Ireland and Greece to more stable recovering countries like Germany and France.
Either way, the U.S. looks unlikely to follow the U.K.'s lead. Mr. Obama faces the prospect of reinvigorated congressional opposition after the Nov. 2 elections. Republicans say deficit cutting will be a top priority, but it is unclear they will be able to find common ground with the president, especially on taxes and Medicare spending, which is the biggest long-term driver of U.S. deficits.
Asked in an interview if the U.S. could draw lessons from the U.K. budget, Treasury Secretary Timothy Geithner said: "I think that it would be a mistake for us here in the U.S. to shift too early toward substantial restraint on the fiscal side. Our goal is to lock in a more credible fiscal path over the next three to five years."
Market response to Wednesday's announcements in the U.K. was muted, as the moves have long been telegraphed. Sterling was unmoved and government debt edged only slightly higher, as the announcement removed any uncertainty that the government wouldn't follow through.
But while the U.K.'s deficit-reduction numbers haven't changed since June, the global economic picture has. The U.K.'s two main trading partners—the euro zone and U.S.—have seen deterioration in economic data. The U.S. is plagued by a persistently high unemployment rate, stuck just below 10% all year, and growth at 1.7% in the second quarter, a picture economists don't expect to improve much in the third quarter.
Next year, as more European countries join the U.K. in increased fiscal squeeze, economist expect further fall-off in demand.
Mr. Osborne, the U.K.'s youngest Treasury chief in more than a century, grew hoarse as he announced the annual cuts: a 4% drop in police spending for the next four years; deep cuts in the central government grant to local government, of 7.1% a year in inflation-adjusted terms; a 14% reduction in 2013-14 costs for the Royal Household. Other cuts included a 33% hit to the budget of his own Treasury department.
Mr. Osborne added an extra £7 billion of cuts to the £11 billion already earmarked from a welfare bill, which—including unemployment compensation, worker disability and government retirement benefits—is equivalent to around 14% of the country's gross domestic product. Mr. Osborne also gave warning that Britons will have to work longer, confirming that the state pension age will rise by a year to 66 from 2020.
Mr. Osborne said he is still investing to grow, announcing an annual £2 billion increase in investment in capital projects and saying he would protect the education and science budgets in a bid to spur private growth.
Still, the coalition government's cuts will lead to the loss of 490,000 jobs in the public sector by 2015.
"Cutting government spending in the short run can have substantial costs, even if there are long-run benefits," says Valerie Ramey, an economist and fiscal policy expert at the University of California San Diego. Ms. Ramey studied U.S. defense cutbacks in California in the 1990s, and found it took years for workers affected by the reductions to find new jobs, often at lower wages.
Still, she says, there might be no alternative for the U.K.—or for the U.S. "Not coming to terms with the serious problem which underlies these deficits...is just not sustainable," she says.
Job losses will likely herald a period of industrial unrest in the U.K. Already, in recent weeks, some workers in Britain have mounted short strikes.
"There is anger and frustration," said Peter Lockhart, an official at the Public and Commercial Services Union speaking from a rally outside of Parliament. "Quite clearly we will be gearing our members up to look at some kind of action." As charities began looking through the small print, many began to cry foul about what the cuts to welfare will mean, with £2 billion in savings coming from limiting to one year a benefit that goes to disabled people or those currently too sick to work.
The government will also face a range of accusations, including that it is damaging Britain's important arts industry, weakening the country's armed forces and impairing law enforcement.
"You can't take a fifth off the police budget and not expect there to be some detrimental effect to the communities we serve," says Paul McKeever, a sergeant in London's Metropolitan police service. The Police Federation he chairs estimates that cuts could lead to a loss of as many as 20,000 of the 142,000 officers in England and Wales.
Government departments will now work out what the cuts mean, before returning in a month to publish a four-year business plan."It is a hard road, but it leads to a better future," Mr. Osborne said of the spending cuts. "We are going to bring the years of ever-rising borrowing to an end. We are going to ensure, like every solvent household in the country, that what we buy, we can afford."—Laurence Norman contributed to this article.