Committee for a Responsible Federal Budget

Britain's Spending Cuts

May 18, 2010

With a new government in place, the UK is moving fast to trim their budget deficit.  Treasury head George Osborne is expected to announce £6 billion in spending cuts (about $9 billion) next week to cut into their £163 billion deficit ($235 billion, 12.6% of GDP).  It seems that the financial market turmoil in Greece has spooked the government into taking action immediately, rather than waiting for the economy to be in full swing. The cuts are relatively modest, bringing the deficit down by only 0.5% of GDP, but they should at least help assuage investors, and The Financial Times suggests that more cuts will be coming in the future.  They will be necessary, considering that Britain's debt-to-GDP ratio will hit 90% next year.  Just to demonstrate the volatility of European markets and their sensitivity to debt-hiding as Greece did, The Times said that sterling fell just based on an accusation by the new government that the old Labour government had fixed fiscal forecasts.

The UK government should be applauded for moving quickly to get their deficits and debt under control before the markets force severe action on them (we must also note that Nick Clegg, now Deputy Prime Minister of the U.K. is a member of the Announcement Effect Club) . Our own government should take note of the steps that Britain is taking.  Although it would be unwise for us to start reducing deficits immediately, we can enact a deficit-reduction plan now that will take effect slowly as the economy recovers. The longer we wait, the more severe our actions must be, and if we wait until crisis, the actions will need to be draconian.