British Government Unveils "The Cuts"

Yesterday, British Chancellor of the Exchequer George Obsorne unveiled the reductions in government spending that the nation has been dreading for months. While he spared some areas like the National Health Service, these are the most severe cuts since the 1918 Liberal-Conservative Coalition led by David Lloyd George. That is correct; The Cuts of 2010 are more severe than those of Margaret Thatcher's in the 1980s. And sadly, the result is likely to be the same widespread, needless misery as a failed economic idea gets another try.

The government's ambition has always been to get rid of Britain's deficit in the course of this parliament -- that is, in five years' time. So, the LibCon Coalition is cutting £80 billion in spending. The government is wagering that the private sector will make that up (unleashing the free market's power to drive growth, or some such piffle) so that GDP doesn't drop. About 490,000 public sector employees will lose their jobs by 2014, which means that the private sector needs to create than many for unemployment merely to stand still. The British economy would have trouble doing that even in good times. For every 200,000 out of work, the UK welfare bill rises £1 billion.

What lies ahead is a vast reduction in aggregate demand and poor economic prospects as a result. The same thing happened under Prime Minister Lloyd George; in opting to pay off the post-war debt, the government sent the unemployment rate from 6% to 19%. In doing so, the debt as a percentage of GDP went from 114% to 180%. In short, the government lost its ability to pay off the debt by trying to pay off the debt. Most over Britons over 40 remember Mrs. Thatcher (as she then was) driving official unemployment over the 4 million mark.

Contrary to Tory beliefs, government is not just like a household. Households must balance their budgets more or less constantly. But what household can create its own currency (and also set the value of that currency), determine all on its own how much it receives in income and can decide what price to pay for goods and services it consumes? Governments can do all of these things. Moreover, individuals get old, stop working and die; that is to say, they must earn much while hale and hearty and save a portion of that in order to continue consuming when they can no longer earn. Governments are immortal. Government must manage demand (and must run a surplus and pay down debt in good times, but that is a story for another day).

One is particularly disappointed in the Liberal Democrats as the junior partner in the Coalition. As the junior members of the team, the LibDems were never going to stop The Cuts. However, taking £18 billion out of welfare spending (£7 billion yesterday and £11 billion earlier) at a time of growing need among the poor and unemployed is a recipe for disaster. They promised The Cuts would be fair. Johann Hari writing in today's Independent stated, "one of the richest corporations in Britain, Vodafone, had an outstanding tax bill of £6bn -- but Osborne simply cancelled it this year." He also points out that City bankers are handing themselves £7 billion in bonuses this year (and it is from him that this journal learned of the severity of the Lloyd George cuts). In other words, the bankers' bonuses are equal to what the poor are losing.

Two smaller countries took two different paths when the economic bubble burst. South Korea spent like money was going out of style. It was the first economically important nation to come out of the recession (although Australia avoided it altogether as did China). Meanwhile, Ireland slashed spending, laid off public sector workers, and it now is suffering more than any developed country. One fears that, across the Irish Sea, Ireland's neighbors are about to challenge it for the title of the Developed World's Weakest Economy.

© Copyright 2010 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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