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Could drastic budget cuts like the British have made happen in the U.S.?

The British government unveiled the country's steepest public spending cuts in decades on Wednesday, sharply reducing welfare benefits, raising the retirement age earlier than planned and eliminating almost half a million public sector jobs over the next four years as the country seeks to free itself of crushing debt from the global financial crisis.

Naturally, in this country, that raises the question of whether such drastic cuts could be made in the United States.

NPR put the question to David Wessel, economics editor of the Wall Street Journal.

George Osborne, the Chancellor of the Exchequer, as Britain's top finance minister is known, has ordered spending cuts totaling $130 billion through 2015, which amounts to about 1 percent of gross domestic product per year. That would be the equivalent of slashing the U.S. budget by $250 billion in a single year — a level of pain that isn't "even in the talks stage" here, Wessel told NPR's Renee Montagne on Morning Edition.

Instead, Wessel said, $250 billion is about what President Barack Obama asked the deficit reduction commission that he appointed to cut over four years.

"Basically, Britain is proposing to wipe out its deficit in five years, and President Obama's plea is that we come up with some policies that will leave us with a deficit of 3 percent of GDP by 2015," he said.

The British plan

"Today is the day when Britain steps back from the brink," Osborne told Parliament as he laid out an ambitious and potentially risky plan to reduce debt.

"It is a hard road but it leads to a better future," he said. "To back down now would be the road to economic ruin."

He said that 490,000 public sector jobs would be lost over the four-year savings program and the size of government departments in London would be cut by one third. Public spending would be cut by about $130 billion by 2015.

Britain's public deficit is among the highest among developed economies, running at 11.5 percent of total economic output, compared with 10.7 percent in the United States and 5.4 percent in Germany. The debate that had seized Britain in advance of Wednesday's announcement related to whether deep cuts in spending would slow recovery, leading to a so-called double-dip recession.

Osborne promised savings of an annual 7.1 percent in the budgets of local councils and said there would be a freeze followed by a 14 percent cut in tax funds allocated to maintaining the royal household of Queen Elizabeth II. Public housing tenants, he said, would face higher rentals closer to the market rates for private housing.

Defense spending would be cut by 8 percent by 2014, he said, but promised not to reduce spending on British forces in the Afghanistan war.

The National Health Service — one of the most politically sensitive institutions in Britain — would be allocated more funds rather than less to meet a Conservative election pledge. He also said the "resource money" for schools would increase "in real terms" every year.

Osborne said a planned increase in the official retirement age from 65 to 66 would start four years sooner than planned, in 2020, saving $8 billion a year. He said measures tightening access to welfare benefits, such as payments to long-term unemployed who do not seek jobs, would save more than $11 billion a year.

Additionally, he said, a new 12-month limit would be imposed on people drawing a benefit for long-term sickness. Britain has already said it will restrict once-universal child benefit payments to people earning less than around $70,000 a year.

The average cut in the budgets of government departments, he said, would be 19 percent.

He said a temporary levy on bank balance sheets would be made permanent to raise billions of dollars. Many Britons, like Americans, are angry with big banks perceived in the public eye as leading the world into crisis only to be rescued by taxpayers and reverting to a culture of bonuses and avarice. Osborne said the government would seek to extract "the maximum sustainable taxes" from financial institutions. Like other countries, Britain has spent billions on bailing out banks and priming its economy out of recession.

In June, Osborne also unveiled an increase in the value-added tax next year.

The cuts, far more detailed and sweeping than those in many other Western nations, were depicted by the opposition as a gamble. Alan Johnson, the opposition Labour finance spokesman, told Parliament: "Today's reckless gamble with people's livelihoods runs the risk of stifling the fragile recovery."

Could it happen here?

"I think the most interesting thing is that the new British government is willing to tackle entitlement spending, the benefits that upper- and middle-class and, in some cases, poor people get in Britain," Wessel, the Wall Street Journal editor, told NPR. "It's something that people talk about doing here, but something that people are afraid to actually do."

Such cuts are feasible in Britain because the climate is much different from in the United States, where politicians of all stripes talk vaguely about reducing spending but rarely have the backbone to be specific, he said.

"They have a parliamentary system where what the prime minister wants, he gets," Wessel said. "They elected a government that was promising austerity and they're getting it."

So what could the United States do if it wanted to get serious about cutting its own deficit?

Raise the retirement age on Social Security and "change the way we inflation-adjust all sorts of federal benefits," Wessel said. "We'd have to make deep cuts in departments across the government — defense to education — and we'd have to revisit health care" in order to slow its growth "for real this time."

Information from the New York Times was included in this report.


What's being cut

Highlights of the British government cuts

• About 490,000 public sector jobs likely to be lost

• Average 19% four-year cut in departmental budgets

• Structural deficit to be eliminated by 2015

• Over $11 billion in additional welfare budget cuts

• Police funding cut by 4% a year

• Retirement age to rise from 65 to 66 by 2020

• English schools budget protected; $3.2 billion extra for social care

• National Health Service budget in England to rise every year until 2015

Source: BBC

Could drastic budget cuts like the British have made happen in the U.S.? 10/20/10 [Last modified: Thursday, October 21, 2010 7:05am]
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