He's making tough and painful decisions in paring down the budget in Great Brittain. Hopefully politicians are beginning to see what unsustainable levels of government look like.
"Two cheers for David Cameron: By announcing some sharp cuts in government spending this week—paired with an honest stab at welfare reform—the British Prime Minister is doing one of the better imitations of New Jersey Governor Chris Christie we've seen lately. Our main regret is that the Tory leader didn't look to Margaret Thatcher as his role model as well.
Mr. Cameron, who came to office in May facing a budget deficit that had swollen to more than 11% of GDP from 3% in 2008, didn't shrink from some necessary decisions in the 106-page spending review he and Chancellor George Osborne unveiled Wednesday. Hefty cuts include a 26% decrease in contributions to local councils by 2015, a 24% cut to the Foreign and Commonwealth office, and another 24% cut to the Department for Culture, which includes the BBC. The Beeb's notorious mandatory annual license fee of £145.50 ($229) will be frozen until April 2017, which will no doubt help the budget medicine go down better among the British public.
Also taking a hit is the U.K.'s Ministry of Defense, whose budget will shrink by 7.5% in the coming years. That means that Britain will immediately retire an aircraft carrier and the fleet of Harrier jump jets that helped win the Falklands War. It will also mothball one of the two replacement aircraft carriers it is currently building and shrink the size of its land forces. These cuts are especially painful given the important role British troops have played in Iraq and Afghanistan. But a diminished role in the world is what happens to nations that opt to spend as lavishly on entitlements as Britain has in recent years.
Taken together, the cuts could bring the budget deficit to 1.1% of GDP by 2016, although that depends on economic growth. They would pare public spending to the pre-crisis level of about 40% of GDP, down from the near-50% it is today. That's still too high for our taste; for all the commentary about this being the most draconian exercise in austerity the West has seen in a generation, spending will still rise by £43 billion ($67 billion) over the next five years, at least in nominal terms.
Still, Mr. Cameron deserves credit for bucking the neo-Keynesian consensus—and the occasional wagged finger from the Obama Administration—and pulling Britain back from the spending brink.
Equally commendable is the Prime Minister's efforts to reform the U.K. welfare system, spending for which rose by some 40% during the governments of Gordon Brown and Tony Blair. Currently, the effective marginal tax rate for getting off the dole in Britain is a whopping 95%, hardly an incentive to find a job. That will be cut, although only to about 70%, and the current smorgasbord of welfare programs will be dramatically simplified.
So far so good. But if a government is going to move people from welfare to work, it's also going to have to offer a pro-growth agenda that permits businesses to create jobs. And here is where Mr. Cameron's austerity blueprint falls short. Mr. Osborne this week has promised that he would soon introduce the "maximum sustainable" tax on banks, calling into question the future attractiveness of London as a global financial capital. The government had already announced a 2.5-percentage-point rise in the VAT, to 20%, an increase in capital gains tax to 28% from 18%, and it has no plans to bring the top marginal income tax rate down from its current 50%.
Nor does it help for the government to continue to fund fashionable environmental boondoggles, such as £1 billion "commercial scale carbon capture and storage demonstration project," or the £200 million it means to spend for wind-power generation.
If Mr. Cameron's government wants economic growth, it will have to move in the opposite direction, especially on taxes; a diet of budget cuts alone won't do it. It will also leave his government politically vulnerable to the charge that mediocre economic results are the result of insufficient spending. The truth is that government can neither spend nor cut its way to national prosperity. Its role is to create the conditions in which businesses and entrepreneurs can do it themselves.
That's an economic lesson Mrs. Thatcher understood. Mr. Cameron, Mr. Christie and other conservatives on this side of the Atlantic could all benefit from it."
http://online.wsj.com/article/SB10001424052702304023804575566431921159198.html
