Moody’s decision last week to downgrade Great Britain’s credit rating surprised no one, including the markets, which largely shrugged the news off. The credit-rating agency arrived late to the party, just as it did in the United States and in several of the eurozone’s distressed countries. The market is quicker to take into account the botched finances of each nation.
That’s cold comfort to Chancellor of the Exchequer George Osborne and Prime Minister David Cameron’s government, who have used the need to maintain the country’s Aaa rating to advocate for fiscal austerity.
The problem is that the talk of austerity has been exactly that: just talk. Her Majesty’s government has continued to spend ever larger amounts, even during the Great Recession. Government outlays were about $955 billion in 2009. That jumped to $1.04 trillion last year, and is expected to climb even higher — to $1.14 trillion by 2017. Whatever else might be shrinking in the United Kingdom, it isn’t the size of government — or the size of deficits.
The increase in spending has outstripped increases in revenue from the only “austerity” being practiced — tax hikes. The British government already pulls in a staggering 39 percent of the economy’s output. (The U.S. federal government, by comparison, collects 26 percent.) Nonetheless, the United Kingdom’s fiscal deficit is larger than that of Europe’s near-bankrupt nations. According to the Organization for Economic Cooperation and Development, the British government deficit totaled 8.7 percent of gross domestic product in 2012, beating Greece’s 7 percent, and Italy’s 3 percent.
As the British government has expanded, the British economy has shrunk, with the current gross domestic product 3 percent below its pre-crisis high. After seeing a small bump from the Olympics, it looks like recession will be back this year.
Cutting government spending is the only way to rejuvenate the economy. The government isn’t going to be able to squeeze more hard-earned sterling from long-suffering British taxpayers. Raising the top income-tax rate to 50 percent failed to yield additional revenue, forcing the government to return to a rate of 45 percent. There is simply no way to increase tax revenue to fund the level of projected spending.
The United Kingdom does have one source of short-term policy flexibility not available to Greece, Italy or France. Since it did not adopt the euro, Britain can run the printing presses to fund its deficit. This is a policy rife with risk, as increasing inflation adds uncertainty and reduces the incentive to invest, which in turn will keep the country off a growth path.
Unfortunately for the United Kingdom, if the current government has shown little inclination to rein in spending, the alternative is likely to be far worse. Labor’s shadow Chancellor Ed Ball cited the Moody’s downgrade as evidence of the failure of austerity — even though there has been no austerity (on the spending side) put into place.
Politicians on both sides of the Atlantic need to realize the spending spree can’t go on forever.
Nita Ghei is a contributing Opinion writer for The Washington Times and Policy Research Editor at the Mercatus Center.