A Lesson and a Warning From Britain

Today, George Osborne, Britain’s Chancellor of the Exchequer – the man responsible for Britain’s budget –announced the results of a high-profile spending review. He promised cuts, and he delivered. The question is whether the cuts will be deep enough, and Osborne’s other policies wise enough, to restore Britain to financial stability.

After 13 years of Labour profligacy, the need for cuts is obvious. Today, the government spends over 47 percent of Britain’s national income. Think about it: in the U.S., that would be like the doubling the size of the federal government overnight. Except during the world wars, the British government has never binged so heavily.

In June, Osborne promised that spending would come down to just under 40 percent of national income by 2015-16. That’s a 7 percent cut: over a comparable period in the 1980s, even Margaret Thatcher cut by only 4 percent. But with creditors around the world worrying that Britain would follow Greece down the road of national bankruptcy, Osborne’s target seemed the only salvation.

But while cutting in general is popular, cutting anything in particular is always difficult: everyone wants everyone else to bite the bullet. For the sake of winning the election, the Conservative Party put the National Health Service and foreign aid off limits. Wisely, the government decided that, with the war ongoing in Afghanistan, defense needs to be sheltered from the full impact of the cuts, which collectively amount to an average of 19 percent.

A central target in Osborne’s sights was welfare payments, where he plans to save 7 billion pounds a year. But though welfare payments are a bloated and justifiably vulnerable target, they amount to only a quarter of the government’s spending. Osborne recognized that he could not meet his spending goals simply by cutting welfare. More broadly, he recognized that the British state is far too large and needs to be rolled back.

Thus, over the long run, Osborne’s effort to shrink the size of the public sector as an employer matter even more than his plan to reduce welfare spending. Cuts in public spending can quickly be reversed by the next government, but it takes longer to hire new employees. Keeping the government small – or making it smaller – is the best way to make sure that the spending cuts stick. Osborne’s goal of eliminating 490,000 government workers, about 8 percent of the total, is the most praise-worthy part of his plans.

The British left will always denounce even the slightest trimming as heralding the end of the universe. Already, they are attacking Osborne’s plans as a “reckless gamble.” That is ridiculous: it was Labour that took and lost the gamble, and it’s the Conservative-led government that’s trying to recover from it. It’s encouraging that, while a million march in France over the prospect of an increase in the retirement age to 62, Osborne’s proposal to raise the retirement age to 66 has gone down quietly.

If anything, Osborne’s cuts are likely to be too modest. By 2015-16, the British government will, according to Osborne, be spending more than it is today. The cuts will come only because the government plans to grow more slowly than the rate of inflation over the next five years. If the bond markets decide that Osborne has been too cautious, the cost of Britain’s borrowing will rise, and interest payments will eat away at the savings he’s made.

Britain’s financial mess is both a lesson and a warning to the rest of Europe, and to the United States, as are the steps Osborne has taken to get out of it. Demanding cuts when you’re in opposition is easy, but as the British spending review shows, it takes determination when you’re in office to focus on the essentials and to see cuts through to reality. If you want to get the size of government down, you need to grow the economy. That means that lowering and simplifying taxes is even more valuable than just cutting spending. As Ronald Reagan and Margaret Thatcher realized, lower taxes, economic growth, and smaller government are a virtuous circle.

That is precisely what Osborne is counting on: his forecasts assume 2.7% growth per year, an optimistic estimate. But if the growth does not materialize, Osborne will not reach his target. By reducing the corporate tax rate in June, Osborne started down the right path. But by simultaneously increasing the national sales tax (the VAT), and by increasing capital gains taxes, he offset some of the effects of the corporate tax reduction. Similarly, by imposing a permanent tax on bank balance sheets, he’s placed a new burden on the City, the center of Britain’s world-class banking sector.

What Osborne announced Wednesday matters, politically and financially: without cuts, no plausible amount of growth can save Britain. But even more important is the determination he manifests – heralded, it may be, by his attack on work-sapping welfare payments – to advance policies that allow Britain’s economy to grow, and Britain’s state to shrink in proportion.

If Osborne tries to do it all with cuts, he will not succeed. His success will ultimately be measured by the extent to which he understands that cuts are simply a necessary means to the end. But at least he has begun, which is far more than we in the United States have done. If we are wise, we will not only learn from Osborne’s example, we will improve upon it.

Ted Bromund, Ph.D., is the Margaret Thatcher Senior Research Fellow at The Heritage Foundation.