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Does Austerity Lead to Prosperity?

Updated on November 30, 2011
UK Chancellor of the Exchequer George Osborne
UK Chancellor of the Exchequer George Osborne

American financial guru Dave Ramsey is fond of giving debt-ridden callers the following mantra: “Rice and beans, beans and rice.” This is not nutritional advice, but a clarion call to downsize their quality of life to bare necessities. Often this contraction begins with re-defining what a necessity is, then making the required albeit painful adjustments. Ramsey can claim many success stories and grateful followers.

What about nation-states wracked by debt? Is the rice-and-beans formula suitable to governments, particularly those with generous social service commitments and histories of paternalism? In a family, if the breadwinner experiences a cash flow interruption, he (or she) must trim the budget for himself and his dependents until such time that he can regain his previous level of income. Sadly, few governments are breadwinners, but all are bread takers, taxing citizens to pay for a myriad of services. Bread is only won by growing economies.

Great Britain is one such government struggling with debt and a stagnant economy. The current coalition government of Tories and Liberal Democrats embarked on a program of austerity upon taking office in the spring of 2010. As demonstrated by Greece, belt-tightening is not well-received by populations accustomed to robust government benefits. In announcing the austerity measures, therefore, Chancellor of the Exchequer George Osborne proposed to eliminate the United Kingdom’s structural deficit by as early as 2015 through an austerity program based primarily on budget cuts, though modest tax hikes were also factored in. Osborne forecasted a quick subsequent uptick in private sector growth and investment as a result. Except…

Osborne had to amend his predictions this week. In response to the autonomous Office for Budget Responsibility – analogous to the American Congressional Budget Office – estimate that the structural deficit would not disappear until 2017 and that growth would not exceed three percent before the next election in 2015, Osborne had to stretch his scenario over a longer period: more borrowing, more cuts, fewer raises for public employees, and the very real possibility of recession.

Does this discredit austerity as a policy for fiscal health? Hardly. The UK is in a three-sided vise grip of food and energy inflation, the ripples from the eurozone debt crisis, and the near-collapse of its own banking system. None of these factors were aggravated by austerity at home. But, they have dampened growth predictions, which were supposed to have pulled the UK out of its doldrums by 2015 . Extending austerity measures for five more years may be politically impossible in a culture so heavily weighted toward government spending.

Public frugality should not be a casualty of this admittedly gloomier future. The painful medicine administered by the coalition government now is the only chance of a stable economic future for the UK, as its continental neighbors will only envy Great Britain’s current hardships.

Paul Johnson, director of the UK Institute for Fiscal Studies, is no fan of the current austerity regimen:“Certainly there has been no period like it on the UK in the last 60 years.” One hopes Mr. Johnson has asked himself if the last 60 years contained the seeds of the current malaise. More likely, in an age of severely shallow public discourse, the past year of fiscal discipline will be blamed for everything. After all, who wants to replace fish and chips with rice and beans?


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