UK's "Unavoidable" Austerity Budget Takes on Public Sector Unions

Heading into G-20, Europe sent president Obama an unmistakable message that budget deficits are more important than stimulus.

I mentioned that yesterday in Europe Slams Obama's Stimulus Plan; History Shows Obama's Plan is Ass Backwards; Yuan Falls Most Since December 2008.

Here are a couple more articles on the same theme.

UK Public Sector Unions Face Severe Cuts

Please consider Britain Unveils Emergency Budget

Setting the scene for years of potential strife with the powerful public-sector unions and their allies in the Labour Party, Britain’s new coalition government on Tuesday unveiled the most severe package of spending cuts and tax increases since the early days of Margaret Thatcher’s era.

The cuts and tax increases, including average budget reductions of 25 percent for almost all government departments over the next five years, will make Britain a leader among European countries, including Ireland, Greece and Spain, competing to show they can slash spending and appease investors worried about surging debt. But the sharp reductions defy conventional economic wisdom, which holds that governments should increase spending to stimulate growth when the private sector is weak.

The steps outlined to the House of Commons by George Osborne, the chancellor of the Exchequer, would cut the annual government deficit by nearly $180 billion over the next five years, shrinking Britain’s public sector and instituting tough reductions in public housing benefits, disability allowances and other previously sacrosanct aspects of the country’s $285 billion welfare budget.

Only health and international aid spending would be protected from the 25 percent cuts for government departments by 2015, the steepest fiscal spending reductions since the 1930s. Mr. Osborne also announced a two-year wage freeze for all but the lowest paid among Britain’s six million public servants and a three-year freeze on benefits paid to parents for rearing children, in addition to new medical screening for people claiming disability benefits, part of a bid to cut $16 billion from the annual welfare budget.

Last week, President Obama wrote to the leaders of the so-called Group of 20 nations, including Britain and other major economies, saying that while “credible plans” to cut national deficits were important, cutting them too quickly could lead to “renewed hardships and recession.” The letter was seized upon by the Cameron government’s opponents in Britain, who cited it on Tuesday in condemning the Osborne budget.

“It’s back to the economics of the 1930s,” Ed Balls, a left-wing Labour figure who is one of five candidates running to succeed the former prime minister, Gordon Brown, as Labour leader, said in a BBC interview. Over the longer term, the main significance of the budget may be judged to be the signal it gave that the Cameron government is prepared to wage a political war to reduce the size of the public sector in Britain, which expanded rapidly under Labour. During that time, more than one million jobs were added to the public payroll, and the public sector accounted for roughly half of the economy.

Mr. Osborne made no secret of the government’s intentions. “A genuine and long-lasting economic recovery must have its foundations in the private sector,” he said. “That is where the jobs will come from.”

While I disagree with raising taxes, it is crystal clear Osborne has his head on straight as to what will drive a sustainable recovery. It is equally clear that Ed Balls is a Keynesian clown of the same mold as Krugman and Obama.

The last thing the UK and US needs is a bunch of political hacks beholden to public unions. Freezing wages is only a start. Slashing benefits is what desperately needs to happen.

Osborne Presents "Unavoidable" Budget

The Financial Times discusses Osborne's "unavoidable" Budget

George Osborne, presenting his first Budget as chancellor on Tuesday, unveiled plans to slash spending and raise taxes – including a rise in value added tax from 17.5 per cent to 20 per cent – in order to bring down the UK’s vast deficit and set the country back on the path to sound public finances.

The VAT rise, which takes effect next January 4, and a new £2bn-a-year bank levy were also announced to help reduce the deficit. At the same time, the income tax allowance lower limit will be raised to exempt 880,000 of the lowest earners from paying tax.

The increase in VAT would raise £13bn annually by the end of this parliament, Mr Osborne said. The rise, which was widely expected, came because “the years of debt and spending make [it] unavoidable”.

The structural current deficit should be in balance in the final year of the forecast period – 2015 – and Mr Osborne said: “We will ensure that debt is falling as a percentage of GDP [gross domestic product] by 2015-16.”

The chancellor concluded by saying the Budget aimed to “pay the bills of past irresponsibility”, adding: “Prosperity for all, that is the goal”.

I cannot stress enough the significance of these austerity measures. In the long-term cutting deficits is exactly what needs to happen. In the short-term however, global "growth" is going to take a hit.

Europe is China's largest trading partner, and that partner is now committed to austerity. As a result, China will have to slow unless the US picks up the slack or consumer demand in China picks up dramatically.

Neither is likely.

Get a Grip on Reality

As far as the US goes ... Get a Grip on Reality - Reflation is Dead in the Water.

Even if consumer demand in China picks up, that demand cannot possibly make up for reduced demand in the US and Europe.

The Keynesian clowns are howling all over the globe about this state of affairs.

However, it is very important not to blame austerity measures for killing the recovery, regardless of what happens. There was no global recovery to save in the first place, only a massive, fiscally reckless, coordinated reflation effort that masked the true state of the economy.

It is impossible to spend one's way to prosperity. Europe appears to have gotten the message. Hopefully, Obama will receive the same message in the upcoming mid-term elections.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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