A British Tragedy

The British government announced drastic cuts in spending over the next few years two weeks ago, and its sweeping action has earned praise from pundits. News institutions and ordinary citizens believe that the government is taking bold and necessary action to pull Britain from the brink of bankruptcy. They are right in one aspect—this certainly is bold action. But the tragedy of the unnecessary British policies is that they will be devastatingly counterproductive: These cuts will cause immense pain for Britain’s poor and middle classes, place the country’s fragile economic recovery at enormous risk, and leave debilitating long-term effects.

Britain most certainly has a budget deficit that is far too high, a consequence of misguided financial planning and a recession that has created steep drops in tax revenue. It does need to deal with its budget problems, but now is certainly not the time to do so. The bond markets trusted Britain enough to let it borrow at low rates even before the announcement of the austerity budgets, which suggest that the concern that companies will not begin hiring or investing until the deficit is cut is nothing but a myth the British government uses to make governmental policy for purely ideological purposes.

These cuts will hit the poor and middle class the hardest. Britain’s government has chosen to make some of the most drastic budgetary cuts in the country’s history. About 490,000 public-sector jobs will be cut over the next four years, creating a considerably larger amount of unemployment at a time when job creation is weak. These are jobs that are often held by middle-class and low-income workers who don’t have a wealth of options in today’s jobless British economy, and cutting hundreds of thousands of jobs will add 3.5 percent to the unemployment rate . In addition, long-term unemployment benefits will be drastically cut, a cruel idea during a recession that has more or less become synonymous with long-term unemployment.

David W. Cameron’s grand plan to replace the cuts in the social safety net is for a “big society” of local institutions and charities to help their follow citizens. But British local governing councils are highly dependent on government funds, and because of these cuts, their viability is in question. Simply put, only the British government can perform the collective action needed to protect its poorest citizens, and these budget cuts will leave an enormous and damaging void in the lives of exactly those people—the unemployed, the poor, and the homeless, who, needless to say, depend on government benefits to sustain their budgets during recessions.

Britain’s policy will not only crush the poor and middle class but will also cause immense damage to its already weak economic recovery. The nation’s GDP grew at a measly 0.8 percent in the last quarter, and there is no guarantee that Britain’s private sector is about to come roaring back: Howard Archer, chief European economist at IHS Global Resources, predicts that unemployment in Britain will rise from its current level 7.7 percent to a full 9 percent by 2012. Recent Nobel Prize winner Christopher A. Pissarides, an expert on unemployment, has stated that the British government “shouldn't allow unemployment to become entrenched,” adding later that Cameron’s administration is “probably cutting the budget a little too fast.” Echoing those sentiments, Roubini Global Economics agrees, arguing that “growth is expected to moderate further as surprisingly strong construction output is dragged down by government spending cuts.”

During tough economic times, a government should not cut spending—rather, it should increase spending to make up for the demand that is lacking from the private sector. Politicians often rebut this by citing concerns about government spending “crowding out” private sector spending, but this is only an issue when the economy is at full capacity, and there is actually a shortage of loanable funds. In a situation like this one, however, government spending can lead the economy back to growth by making up for the gap between Britain’s full output capacity and its weak current output. A short-term stimulus combined with a plan that reduces the budget deficit after the economy has recovered would strengthen the economy in the short run and in the long run. Instead, Britain has doomed itself to years of anemic growth if not a double-dip recession.

There are fair and contrasting views of what the size of the British government should be and the degree to which it should participate in the economy. In a simple juxtaposition, the Labour faction believes in a large state that provides many services for its citizens and employs large numbers of people; the Conservative government—as manifested in the Cameron administration—supports a reduced state that plays a smaller role in the affairs of everyday lives. Of course, the Conservative view is a fair viewpoint to hold, but what is unfair is to leave a weak economy at major risk for purely ideological purposes.

During tough economic times, budget cuts are not just silly; they are dangerous.

Ravi N. Mulani ’12, a Crimson editorial writer, is an applied mathematics concentrator in Winthrop House. His column appears on alternate Tuesdays.