Maybe it’s their weather. But for whatever reason the Brits are really good at creating dystopias, those worst of all possible worlds.
1984. A Clockwork Orange. And now finance minister George Osborne’s austerity budget.
The plan announced yesterday projects roughly $170 billion a year in budget cuts and new taxes that are projected to reducethe United Kingdom’s budget deficit from 10% of GDP this year to roughly 2% of GDP by 2015.
The cuts and taxes–$60 billion from the new Conservative-Liberal coalition government plus $110 billion from the Labor government defeated in May elections—amount to roughly 6% of the country’s GDP. (That’s roughly equal to cuts and taxes of $840 billion in the much bigger U.S. economy.)
Wall Street projections suggest that the U.S. needs budget cuts and taxes that range from 3% to 6% of GDP to get its financial house back into something like order.
If you want to know what that would feel like, take a look at Osborne’s budget. That’s what dystopias are for, after all.
Some of the highlights:
- An acceleration of the planned increase in the age to qualify for a government pension to 66.
- An increase in the Value Added Tax (VAT) to 20% from 17.5%.
- A two-year pay freeze for government workers
- A 28% capital gains tax for high income taxpayers
- A three-year freeze on child benefits
- A 25% cut in the budget for all government departments except for foreign aid and health care spending
One potential horror that the plan doesn’t include is the possibility that it won’t work.
Osborne has said that the cuts and taxes are necessary if the United Kingdom is to avoid the fiscal crisis that has engulfed Greece, Ireland, Portugal, and Spain.
True enough. And if the United Kingdom can convince the bond market that it is serious about tackling its budget deficit, then the country will escape the worst of the huge surge in interest rates that the crisis has set off in other countries and the United Kingdom’s banks will avoid being frozen out of international markets for short and long-term funds.
The plan envisions that, after a very short-term hit to economic growth—growth will be 1.2% this year—putting the country on a sound financial footing will yield enough dividends to push the economic growth rate up to 2.3% in 2011 and 2.8% in 2012 and 2.9% in 2013.
Could be.
But these projections seem, well, utopian.
The plan projects that cuts and taxes of 6% of GDP won’t actually push a weak UK economy off a cliff in 2010. In the first quarter of 2010 the UK economy grew by just 0.3%. That was low enough so that the government had to issue soothing words saying that it still expected growth of 1% to 1.5% in 2010.
That was before the cuts and taxes in the most recent budget plan.
If growth in the near term comes in lower than projected, and that then leads to a slower recovery in the out years and lower tax revenues, then the plan for all its pain won’t reduce the government’s budget deficit to the 2% of GDP target by 2015.
And instead the United Kingdom will be looking at still more cuts to balance its account.
That’s the trouble with dystopias. It’s almost always possible to imagine an even darker future. (For my own vision of a long-term global dystopia see my post https://jubakpicks.com/2010/05/25/get-used-to-it-the-global-debt-crisis-will-play-out-over-and-over-again-in-the-next-decades/ )
I find it hard to see how the US will balance the budget down the road without administrating some of the bitter medicine the Brits are having to swallow. Borrowing money in China to give tax breaks to the rich, ostensibly so they could invest more and hence grow the US economy, the policy of the previous administration, obviously did not work too well.
Good one Neal.
No one’s told you, and you obviously haven’t noticed that JJ is a class act. And he never (that I’ve seen) responds to posts with pejoratives in them. Or that aren’t directed to matters of market analysis, currency, or something relevant … like the topics of his posts!
This is a forum for those who like to talk about making money in the market – and those who like to hear what JJ has to say. Politics are over there on the right (Drudge) or to the left (Huffingpost).
Have a nice day, sir.
Jim,
When are you going to analyze the new tax our socialist President will introduce in the near future – a 20% VAT? This along with new taxes on those investment – hedge funds- private equity scoundrels, expiration of the hated Bush tax cuts and enhancements to the Internal Revenue Code will, in my calculation, come up short of 3-6% of GDP.
> 984. A Clockwork Orange.
I would like to add Brazil to this list.
Excellent movie…
http://www.imdb.com/title/tt0088846/
off topic, but while the Tisches are free to default on a $5 billion mortgage without penalty, the small fry who decides to default on his $250,000 mortgage gets taken to the woodshed. Good grief. http://articles.moneycentral.msn.com/news/article.aspx?feed=AP&date=20100623&id=11634950
Off topic.
Australia’s Kevin Rods OUT! Good for BHP, Rio Tonto…
http://www.bloomberg.com/news/2010-06-23/rudd-may-be-ousted-by-australian-deputy-as-mining-tax-plan-sinks-support.html
Definitely interesting timing on the UK’s austerity budget but I guess they figured they had the political mandate to do it now. Be interesting to see how long the government survives if this helps give the UK a nice hard shove back into recession and their debt to GDP ration shrinks little or none because of declining tax revenues.
I was going to suggest it might be time for a little British humor, but they clearly consulted Benny Hill’s ghost for their budget plan…
OK, the other thing my wife complains about, besides the time I spend reading Jubak’s Picks et al, is the grumpy mood I’m in when I finally sign off. But thanks for the insight, Jim (incite?). I am not an ostrich. I am not an ostrich. I am not an ostrich…