Fighting record debt, the British government on Wednesday outlined the largest cuts to public spending since World War II — slashing benefits and thousands of public sector jobs with an austerity plan aimed at restoring the nation's finances.I'm against the "austerity at will" strategy backed by the G20—this is the strategy of pursuing austerity but only if some country wants to, and without any co-ordination between countries—but I do think some countries have to cut spending. USA isn't one of them but Britain is.
After the country spent billions bailing out indebted banks, and suffered a squeeze on tax revenue and an increase in welfare bills, Treasury chief George Osborne staked the coalition government's future on tough economic remedies.
Mr. Osborne confirmed there would be 81 billion pounds ($128 billion) in spending cuts through 2015, which he claims are necessary along with some tax increases to wipe out a spending deficit of 109 billion pounds ($172 billion).
As many as 500,000 public sector jobs will be lost, about 18 billion pounds ($28.5 billion) axed from welfare payments and the pension age raised to 66 by 2020, earlier than previously planned.
As I have said in the past, Britain is kind of screwed because their financial sector is very large relative to the economy. This meant, not only did their economic prospects (taxes on financial income, jobs in the financial sector, etc) weaken, it also meant that the government bailout of failed financial institutions is very large compared to their economy. In contrast, the financial sector bailout in a country like USA isn't that bad. USA can simply socialize the financial sector losses by taking profits from productive sectors (like technology, healthcare, etc) and passing them to the failed financial institutions. Britain and others like it, such as Iceland or Ireland, can't do that without paying a big price. And we are seeing the consequences of it.
The spending cuts appear to be across the board and pretty deep. Eliminating 500,000 jobs over the next 5 years is pretty sizeable, even for a country the size of Britain. Doing so while the economy is weak is going to be painful.
Although some think this is a disadvantage, I disagree and think one advantage in Britain's arsenal is that they can devalue their currency (unlike others who are tied to the Euro or have their currency pegged to something strong). It looks like currency wars, which, as far as I'm concerned, is the modern equivalent to trade wars, looks almost certain.