UK austerity policies a cautionary tale
By Megan Woolhouse
Globe Staff / December 29, 2012
SALISBURY, England — Trussell Trust was founded here more than a decade ago to help starving children in Bulgaria, but in recent years the nonprofit has expanded its mission dramatically in a once-unthinkable direction, opening more than 200 food banks across the United Kingdom.
This year alone, the centers have distributed free groceries to about 130,000 British families, more than double the number in 2011.
“The fact that people need food in 21st-century Britain is certainly shocking,” said Molly Hodson, a spokeswoman for the trust, as she sorted canned beans at the Trussell Trust clearinghouse recently.
“This is a time of crisis in the UK.”
As US political leaders debate tax increases and spending cuts to close the nation’s budget deficit, England is implementing deep cuts in government spending as part of a multiyear plan to halt a widening budget gap and and preserve the country’s AAA credit rating. But two years of austerity have backfired as a struggling economy slipped back into recession and a plan that was supposed to bring deficits under control within five years will take longer than predicted.
“An austerity drive now would raise our already painfully high unemployment rate and might trigger another recession,” said economist Peter Diamond, a Nobel laureate and professor emeritus at the Massachusetts Institute of Technology. “If the cuts are big enough, it can derail the economy and set it back, which is what we are seeing in Britain.”
The government estimated 66,000 public jobs would be lost in the first two years of austerity, but so far about 372,000 have been eliminated, according to Lombard Street Research, a London forecasting firm.
“It’s a hard road, but we are getting there,” Osborne told the House of Commons. “Britain is on the right track — and turning back now would be a disaster.”
The British economy had appeared to be recovering from its own housing bust and financial crisis, but spending cuts enacted in 2010 began to take a toll by the end of that year, and Britain slipped into a double-dip recession.
“The consumer died, and at the same time, Europe, the UK’s biggest trading partner, went into a tailspin,” said Carl Weinberg, chief economist at High Frequency Economics a forecasting firm in Valhalla, N.Y.Continued...
http://www.boston.com/business/news/2012/12/30/austerity-policies-cautionary-tale/FK8sLfyeywNfX1O7sliReN/story.html
This year alone, the centers have distributed free groceries to about 130,000 British families, more than double the number in 2011.
“The fact that people need food in 21st-century Britain is certainly shocking,” said Molly Hodson, a spokeswoman for the trust, as she sorted canned beans at the Trussell Trust clearinghouse recently.
“This is a time of crisis in the UK.”
As US political leaders debate tax increases and spending cuts to close the nation’s budget deficit, England is implementing deep cuts in government spending as part of a multiyear plan to halt a widening budget gap and and preserve the country’s AAA credit rating. But two years of austerity have backfired as a struggling economy slipped back into recession and a plan that was supposed to bring deficits under control within five years will take longer than predicted.
In many ways, it is a cautionary tale for political leaders in Washington who face a Jan. 1 deadline to reach a budget compromise before a series of automatic spending cuts and tax increases take effect. About $500 billion in US government spending cuts will take effect unless President Obama and Congress reach an agreement.
Some economists, noting England’s malaise, said such measures would defy generally accepted economic views that cutting spending at a time of economic weakness only hurts the economy more.
“An austerity drive now would raise our already painfully high unemployment rate and might trigger another recession,” said economist Peter Diamond, a Nobel laureate and professor emeritus at the Massachusetts Institute of Technology. “If the cuts are big enough, it can derail the economy and set it back, which is what we are seeing in Britain.”
Britain’s Parliament, led by Conservative Prime Minister David Cameron, enacted steep spending reductions when his coalition government took office in 2010. Most departments were required to slash at least 25 percent from their budgets, shaving $180 billion from the nation’s $1.4 trillion debt.
The government estimated 66,000 public jobs would be lost in the first two years of austerity, but so far about 372,000 have been eliminated, according to Lombard Street Research, a London forecasting firm.
The Cameron government also imposed a wage freeze for all but the lowest tiers of government workers, tougher requirements to qualify for public housing and disability payments, and massive cuts to the welfare system.
At the same time, the sales tax on most goods and services was raised to 20 percent from 17.5 percent and capital gains taxes on investments increased to 28 percent. Corporate taxes were reduced to 24 percent from 28 percent over five years to encourage business growth and hiring.
Cameron said the measures were necessary for a nation facing its largest-ever peacetime debt, a financial abyss that grew deeper after a massive taxpayer bailout of the nation’s banking industry in 2008 and 2009.
The government and its supporters concede that these steps are painful in the short term, but argue they will maintain the confidence of financial markets, attract business and investment, and lead to prosperity, much as the austerity policies of Margaret Thatcher in the 1980s revived a moribund British economy.
Earlier this month, George Osborne, chancellor of the exchequer, the government’s top financial official, announced that austerity measures would need to be extended into 2018 because of a slower recovery than forecast, which he blamed on the broader economic slowdown in Europe. But Osborne asserted that the bitter economic medicine was beginning to show results, as evidenced by the flow of investment into British government bonds, a sign of increasing confidence in the UK economy.
“It’s a hard road, but we are getting there,” Osborne told the House of Commons. “Britain is on the right track — and turning back now would be a disaster.”
The British economy had appeared to be recovering from its own housing bust and financial crisis, but spending cuts enacted in 2010 began to take a toll by the end of that year, and Britain slipped into a double-dip recession.
“The consumer died, and at the same time, Europe, the UK’s biggest trading partner, went into a tailspin,” said Carl Weinberg, chief economist at High Frequency Economics a forecasting firm in Valhalla, N.Y.Continued...
http://www.boston.com/business/news/2012/12/30/austerity-policies-cautionary-tale/FK8sLfyeywNfX1O7sliReN/story.html
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