The U.K. government, struggling with a disappointing economic strategy, deserves some sympathy. It also needs to show some patience.
In its first budget last year, Prime Minister David Cameron’s coalition announced higher taxes and lower public spending, aiming to contain borrowing, shore up market confidence and spur growth. The policy was hailed by many at the time as bold and decisive. Now, with the economy at risk of falling back into recession, Cameron and his team are under fire.
At face value, the “autumn statement” issued by Chancellor of the Exchequer George Osborne on Nov. 29 mostly hews to the initial plan. It reaffirms the fiscal target -- to balance the budget, after adjusting for cyclical effects -- and says that, because of disappointing growth, a more protracted squeeze would be needed to achieve it. Osborne promises new cuts in public spending in 2015 and 2016.
In piling austerity upon austerity, the government is testing voters. The current two-year freeze on public employees’ pay has infuriated their unions and led to brief strikes last month. Now, Osborne says, it will be followed by two more years with pay raises capped at 1 percent. Looking at the longer term, the government has decided to raise the pension age for all workers to 67 starting in 2026, eight years earlier than had been planned.
Dependent on Finance
For all this, Osborne blames circumstances beyond the government’s control. He has a point. Britain is a middle-sized economy dependent on internationally traded financial services: Its recovery is at the mercy of global developments. The world economy is growing more slowly than expected. The euro area’s extended crisis is a particular threat. Under any conceivable policies, Britain would be struggling.
Also, the country’s public finances do need long-term repair. Public borrowing is expected to total 8.4 percent of gross domestic product this year, an unsustainable figure. For the nation to stay credit-worthy and keep long-term interest rates low, a credible commitment to cut borrowing was vital. That’s what the government was determined to establish, and British long-term bond yields say it succeeded.
On two points, though, the Cameron government can be fairly criticized. First, when it came to power in May 2010, it had more room for fiscal maneuvering than it admitted. Despite an enormous budget deficit -- public borrowing exceeded 11 percent of GDP in 2009 -- the debt burden, at a little over 50 percent of GDP, looked manageable by European standards. The initial spending squeeze was tighter than necessary.
Under the government’s plan, the debt ratio will peak at less than 80 percent of GDP, still relatively low. Because Britain still has a currency of its own, and a that can act as lender of last resort, a gentler form of fiscal tightening would have been feasible. Wouldn’t that have alarmed the markets? It’s impossible to be certain -- but such a policy might actually have been more credible than the present one, because it wouldn’t have generated so much voter displeasure.
Second, the government exaggerated the benefits of showing fiscal backbone. If Britain had been facing national bankruptcy, Osborne might have been right to say budget tightening would lead to short-term growth. But it wasn’t, so his claim was overstated, and now he takes the blame for a sluggish economy.
In hindsight, it was a mistake to make such a virtue of fiscal rigidity. The worsening economy was a foreseeable turn of events. Adjusting to it has become harder because the government has nailed itself to its budget framework. To markets and voters alike, abandoning the plan now would look like surrender.
Fortunately, as last week’s statement made clear, the policy framework allows a bit more flexibility than the government first implied. Osborne, for example, now says he will stretch out the period of austerity rather than try to balance the budget by 2015, as originally planned.
If the U.K. finds it needs to respond to more bad news -- for instance, if Europe’s leaders fail to resolve their fiscal crisis this week, and the continent crashes into recession -- it should not hesitate to push the timetable back again. Cameron and Osborne are right to get the nation’s fiscal house in order, but they should also appreciate that changing circumstances can mean a change of plans.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at firstname.lastname@example.org.