As governments from Greece to Portugal to Spain try to sell markets on their budget-cutting zeal, the country that may face the biggest hurdle is Britain.
Propelled by a robust economy that finally collapsed in 2008, Britain’s spending boom was the most expansive in Europe, producing a welter of shiny hospitals, school buildings and highways, along with a cadre of well-paid public sector officials.
Now the new government must unwind not so much the debt incurred from two years of economic stimulus efforts, but more broadly, the structural deficits built up over more than a decade of expanded health care, education and pension commitments.
Prime Minister David Cameron has talked boldly of closing a British budget deficit now equal to 11 per cent of its gross domestic product. But he also has said that he will allow health spending to outpace inflation, continuing a trend started by the Labour government that has doubled the cost of the government’s National Health Service since 2000.
It is this apparent disconnect between the promises of politicians and the harsh demands of investors for immediate and across-the-board spending cuts that is at the root of the financial crisis in Europe today.
Even after the nearly $1-trillion (U.S.) rescue package arranged by European Union leaders to shore up the weaker euro zone members, financial markets have gyrated as fears build that debt-plagued nations lack the will to stand up to powerful unions and pare back once generous welfare programs.
“You need a martyr to cut this type of deficit,” said Andrew Lilico, chief economist at Policy Exchange, a right-leaning London research group, who has argued that quick and immediate spending cuts would actually hasten economic recovery rather than derail it.
“You need someone to say, ‘I will do the right thing and everyone will hate me.’”
According to a recent analysis by Citigroup, Britain’s structural deficit – meaning the part of the budget gap that will not close even when the economy improves – was 9.2 per cent of GDP last year, ranking third in the world behind rapidly aging Japan and almost bankrupt Greece.
As is the case with other countries in Europe, like Spain, Greece and Ireland, Britain has a deficit that has grown mostly because of a decade of rising government outlays that seemed reasonable at the time, but rested heavily on rising tax revenue that disappeared when the bubble burst.
In a recent report, the International Monetary Fund warned that the countries that would have to make the biggest sacrifices in spending cuts and tax increases to return to pre-crisis levels of indebtedness – Britain, France, Ireland, Spain and the United States – also face the biggest increase in spending demands. These are driven by the rising number of the elderly, thus making the cuts all the harder to impose.
“All developed economies now have in-built structural components in their government deficits due to having pension and health systems and aging populations,” said Edward Hugh, an independent economist based in Barcelona. “And these costs will go up by the year.”
The British chancellor of the exchequer, George Osborne, who has long urged the Conservative Party to trim the deficit, said on Monday that he would push through £6-billion ($8.65-billion) in spending cuts.
Though decidedly modest when compared with a budget deficit estimated to be about £178-billion, the cuts represent an effort to convince skittish markets that Mr. Cameron’s team is committed to fiscal restraint.
The latest menu of restrictions, freezes and spending reversals also represents an effort to convince the public that Britain must be in tune with the budget-cutting in Greece, Portugal, Spain and other parts of Europe.
“The years of public sector plenty are over,” Mr. Osborne said. “The more decisively we act, the more quickly we can come through these tough times.”
