Prime Minister David Cameron's coalition government in Great Britain has just introduced a serious and detailed deficit reduction plan that shows how a responsible government can make hard choices to protect its children from the indulgence of its adults.
Borrowing can make sense when purchasing an asset that will provide benefit far into the future. Borrowing can also make sense to get through a particularly rough economic patch. People can debate about what constitutes a worthwhile long-term benefit, but at some point borrowing becomes indulgence — securing unaffordable short-term benefits at the expense of future generations. Refreshingly, the new political leaders in the UK have admitted that their public debt is indulgent.
Britain's public debt now exceeds 85 percent of its annual GDP, requiring it to make debt payments of over $192 million each day. It has the largest structural deficit in Europe.
So how are they addressing the issue? The government has introduced an austerity package that will cut $130 billion over four years. Close to half a million civil service jobs will be eliminated. Entitlement programs will be reformed and retirement age will rise. Although Britain will not reduce its commitment to Afghanistan, there will be deep cuts in the military, including the scrapping of whole weapons systems.
Let's put this in perspective. Britain is about one-fifth the size of the United States, but it also has a larger public sector on its national payroll. If we tried to do what Britain is attempting it would require roughly $1 trillion in deficit reduction for the next four years. That is four times the amount President Obama has asked his deficit reduction commission to do. If we were to cut one of every 12 government jobs, like Britain, it would mean laying off 180,000 federal workers.
It is fascinating to see the same treasury that once employed John Maynard Keynes propose this serious belt-tightening during a flagging economic recovery. But instead of fretting about what austerity might do to the current economy, the British treasury has decided that fiscal responsibility today will provide long-term benefits in the future.27 comments on this story
When the most recent elections in Britain forced a coalition between the Conservatives and the Liberal Democrats there was initial concern that indecision would reign. Quite the opposite. This centrist coalition is quickly making the toughest of tough choices. Perhaps the simple explanation is that Britain doesn't have the same access to Chinese credit markets that the United States enjoys. But the way we view it, they have chosen to behave like responsible adults. They are throwing away the credit cards and living within their means.