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Consistent and stable economic policymaking has a tremendous impact on economic growth. Most people agree that with America’s impending “fiscal cliff” (the expiration of tax cuts and automatic fiscal sequester at the end of 2012, absent Congressional action) American consumers and businesses do not have the confidence to spend. Contrast this begrudging American approach to that of the British. Beginning in 2010, the British started down a path of fiscally responsible policies comprised of substantial spending cuts and careful monetary policy (consistently low interest rates and incremental actions by the Bank of England). By 2014, this fiscal blueprint calls for an average of 25% real cuts in spending for most federal departments. While the plan is certainly far from perfect and continued exposure to the Eurozone seems to be making its implementation less effective at the present, Chancellor of the Exchequer George Osborne’s fiscal discipline has been lauded by many. The IMF described this approach as “strong and credible” and of the “essence to ensure debt sustainability.” The Economist adds: “The overall fiscal consolidation is tilted towards spending cuts, which will account for three-quarters of the deficit reduction by 2014… Spending cuts work better than tax rises when cutting deficits, if only because they tend to stick.” That was two years ago. Compare those sentiments with a more recent take on the British plan, also by The Economist. Osborne’s 2012 budget called for “no changes to pace or scale of deficit reduction” and stated that the United Kingdom was still on track for a balanced budget by 2015. This would also coincide with a 6% drop in government spending over that time, according to recent IMF data. Britain is following through on its promises of fiscal restraint. Further, in an effort to spur growth, Osborne cut the highest income tax rate and plans to continually cut the corporate tax rate to around 22% by 2015 — a low rate by G8 standards. The British government is also warily protecting itself from further integration with the E.U. and fiercely defending the City of London (world’s most global financial hub) from a potentially devastating financial transaction tax being lobbied for by Brussels. A U.S. deficit-reduction initiative should not emulate all parts of the British plan — their economy did shrink back into an official recession in late April, due in large part to external factors. But the British are correct to realize that certainty in economic policy is crucial for growth. Britain is cutting federal spending while at the same time encouraging business. Thus far, the United States has no agreed-upon long-term credible strategy to address deficits, debt, or growth — much to the chagrin of American business leaders. While the effectiveness of the British fiscal plan remains to be seen, at the very least the plan deserves credit for inserting some certainty into fiscal policy making. It’s more than can be said for Washington and Brussels.
Patrick Girasole is a graduate student at the London School of Economics studying political economy. Previously he was an intern at the George W. Bush Institute’s 4% Growth Project. Patrick has also worked at the U.S. Embassy in Rome, Italy. Patrick graduated magna cum laude from the University of Oklahoma, where he majored in history and political science.Full Bio
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