Wednesday, June 23, 2010

Britain's George Osborne Shows the Way

On June 22, 2010, Britain’s Chancellor of the Exchequer George Osborne spelled out his plans to preserve the credibility of Britain’s sovereign debt, to prevent Britain from becoming the next Greece. Through a mixture of 77% spending cuts and 23% tax increases, Osborne proposed to reduce the budget deficit from £149 billion this year, 10.1% of GDP, to £20 billion in fiscal year 2015-16, 1.1% of GDP. Moreover, these projections rests upon the reports of an independent non-partisan Office for Budget Responsibility, not those of his own Treasury department.

Citing evidence from the IMF, the OECD, and other international studies, Osborne stressed that lower spending was more effective than tax increases in reducing deficits. A further reason to emphasis spending reductions is to lower the share of national income consumed by the government rom 51% of GDP to a more sustainable level by increasing the share of ntional income spent by the private sector.

How to do it? The government will sustain capital spending to modernize Britain’s infrastructure. Civil servants will have their pay frozen for two years, save one million at the lowest pay grade. Full retirement age will be raised from 65 to 66. The civil list, which provides state support for the royal family, will be frozen. Apart from providing the National Health Service with real increases, other government departments will face an average real cut of around 25% over four years, a stunning reduction. Welfare spending, which rose 45% in real terms during the past ten years, will be reduced by cutting or eliminating a number of grants and subsidies.

Several increases in taxation round out the proposed five-year plan. They include an increase in VAT from 17.5% to 20%, an increase in capital gains taxation from 18% to 28% for upper-income taxpayers, and a bank levy to raise £2 billion. Lower-income taxpayers will receive an increase in tax-free allowance, and retirees will have their benefits adjusted by earnings, rather than inflation.

Peter Orszag has announced that he will step down from his post as head of the Office of Management and Budget in July. I suggest his interim or permanent successor carefully study Osborne’s plan and apply its spending cuts to sharply reduce the U.S. deficit over the next five years, instead of maintaining them at trillion dollar levels over next decade.

No comments :