October 23, 2014

Could U.S. Learn From British Experience?

Prime Minister David Cameron’s visit last week to the United States underscored the important relationship between the U.S. and Britain, both politically and economically.

Britain’s new coalition government faces tremendous challenges, many of which are similar to the United States’ problems.  Britain’s public debt was 68 percent of GDP at the end of 2009; the comparable figure for the U.S. was 53 percent.

Cameron’s coalition aims to slash government spending over the next five years.  The eventual goal is to cut Britain’s annual budget deficits in half over five years, which will mean some ministries will face funding reductions of up to 40 percent.  Even the popular National Health Service (NHS) will be ordered to make personnel cuts, although overall it will face much lighter cuts than other ministries.  About 75 percent of deficit reduction will be achieved with budget cuts while the other quarter presumably will come from raising revenues.

The proposed cuts in Britain stand in stark contrast to the three-year freeze on domestic discretionary spending President Obama has proposed.  Although broad generalizations cannot—and, indeed, should not—be drawn from these figures, it is clear that both the U.S. and Britain face long-term challenges to restore fiscal sustainability and public confidence in the ability of government to tackle complex economic and political issues.

In Britain’s parliamentary elections last May, Cameron’s Conservative Party won a narrow victory.  However, the Conservatives did not secure enough seats to capture a governing majority.  In a surprising move, Nick Clegg, leader of the Liberal Democrats, joined Cameron to form a rare coalition government in which Clegg assumed the role of deputy prime minister.  Although the Conservatives and Liberal Democrats are ideological opposites in most respects, tension between the Labour Party and Liberal Democrats led Clegg to support Cameron’s Conservatives rather than Gordon Brown’s Labour Party.

If successful in stabilizing Britain’s government finances, the new coalition government could prove to be a political role model for the U.S., which has seen legislative gridlock for years as Republicans and Democrats have competed for political power in a zero-sum game that has produced record deficits and debt over the past decade.

In the U.S., many economists and policymakers contend that additional government spending is required to bring down the unemployment rate and stimulate the economy.  In Britain the consensus seems to have gone in the opposite direction, with Cameron and other European leaders arguing greater fiscal austerity is needed to infuse more capital into the private sector.

The gap between U.S. and British policy—and European economic policy in general—has become a point of contention between President Obama and European policymakers.  Indeed, President Obama cautioned Cameron in June against premature reductions in government spending which, he said, could prompt a double-dip recession.

Short-term disputes over economic stimulus aside, it is clear that both the U.S. and Britain have their work cut out for them—especially in the long-term—to reduce unsustainable levels of debt that will, if left unchecked, cripple the global economy.