Fiscal Reform: U.K. Style
Our friend across the pond, the United Kingdom, is dealing with its own fiscal challenges. Currently, their debt-GDP ratio stands at over 71 percent. In order to begin to amend this problem, the current government is significantly cutting government spending, such as the recent reduction of the child benefit for high-income Britons. Other cuts, such as the elimination of their child trust fund, £600 million in cuts to entities similar to our GSE's (i.e. Fannie Mae, Freddie Mac, etc.), a recruitment freeze in their civil service and £836 millions in cuts to their business department. This has all been done in order to reduce their spencing last fiscal year by £6 billion. (Click here to read about how much savings we would realize by applying the U.K budget to the U.S. budget.)
Last week, UK Prime Minister David Cameron gave a speech, that among other things, justified why fixing the UK's fiscal problems are better for the country. The following is an excerpt from that speech:
Everyone knows that this government is undertaking a programme of spending cuts. I know how anxious people are. “Yes”, they say: “of course we need to cut spending. But do we have to cut now, and by this much? Isn’t there another way?” I wish there was another way. I wish there was an easier way. But I tell you: there is no other responsible way. Back in May we inherited public finances that can only be described as catastrophic. This year, we will borrow more money than we spend on the NHS.
Just think about that. Every doctor’s salary. Every operation. Every heating bill in every hospital. Every appointment. Every MRI scan. Every drug. Every new stethoscope, scalpel, hospital gown. Everything in our hospitals and surgeries – paid for with borrowed money, much of it from abroad.
And then think about the interest. This year, we’re going to spend £43 billion on debt interest payments alone. £43 billion not to pay off the debt – just to stand still. Do you know what we could do with that sort of money? We could take eleven million people out of paying income tax this year. We could take every business in the country out of corporation tax.
That’s why we have acted decisively – to stop pouring so much of your hard-earned money down the drain. And it’s stopped us slipping into the nightmare they’ve seen in Greece, confidence falling, interest rates rising, jobs lost and in the end, not less but more drastic spending cuts than if you’d acted decisively in the first place. Our emergency budget to show the world that Britain is back on the path of fiscal responsibility.
The United States should follow the United Kingdom’s approach and enact a credible plan to reduce the risk of fiscal crisis down the road. As Prime Minister Cameron said when referring to delaying action, “as a result, the cuts would be bigger, not smaller because the interest payments on that debt would be higher.”