10/20/2010

The UK as latest test for Keynesian Economics

With up to a 500,000 cut in the number of government jobs and a big cut in government spending, my guess is that the UK will be better off. The opposite of what Obama has proposed on spending. I only wish that they weren't increasing tax rates.

Chancellor George Osborne has unveiled the biggest UK spending cuts since World War II, with welfare, councils and police budgets all hit.

The pension age will rise sooner than expected, some incapacity benefits will be time limited and other money clawed back through changes to tax credits and housing benefit.

A new bank levy will also be brought in - with full details due on Thursday.

Mr Osborne said the four year cuts were guided by fairness, reform and growth.

But shadow chancellor Alan Johnson, for Labour, called the review a "reckless gamble with people's livelihoods" which risked "stifling the fragile recovery" - a message echoed by the SNP, despite smaller than expected cuts in Scotland.

Mr Osborne ended his hour-long Commons statement by claiming the 19% average cuts to departmental budgets were less severe than expected. This is thanks to an extra £7bn in savings from the welfare budget and a £3.5bn increase in public sector employee pension contributions. . . .


The Financial Times puts things in perspective:

The sweeping cuts in spending and entitlements far exceed anything contemplated in the US where Barack Obama, the president, has proposed only a three-year freeze on discretionary spending and Congress is still debating whether to extend tax cuts for the wealthy.

The UK cuts of £81bn ($128bn) over four years are the equivalent of 4.5 per cent of projected 2014-15 gross domestic product. Similar cuts in the US would require a cut in public spending of about $650bn, equal to the projected cost of Medicare in 2015

The UK deficit is about 10 per cent of 2010-11 GDP. The US deficit was $1,294bn, or 8.9 per cent of GDP, in the 2010 fiscal year.

Declaring that “today is the day where Britain steps back from the brink”, George Osborne, the chancellor of the exchequer, revealed dramatic reductions to core departments over the next four years, a £7bn fall in welfare support and 490,000 public-sector job cuts by 2014-15.

“Tackling the budget deficit is unavoidable,” Mr Osborne told parliament. “To back down now and abandon our plans would be the road to economic ruin.” . . .

Local government will suffer more than most with reductions of nearly 30 per cent by 2015. The police force will see its budget trimmed by 16 per cent.

Two areas – the £4.6bn science budget and overseas aid, which will reach 0.7 per cent of GDP by 2013 – were protected. . . .


The video at the FT has the former Labour chancellor of the exchequer takes the Keynesian line about "taking money out of the economy." He keeps talking about a "strategy for growth," which just means spending more money on the government programs, where the government decides what the best investments are.

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