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February 8, 2010

America Must Avoid the Path of British Decline

By

The similarities between the United States and the United Kingdom are common knowledge. It is no exaggeration to refer to Britain and America sharing a common political culture.

This should give American strategists pause for thought. It is reassuring for enthusiasts of the Special Relationship. But there is a drawback. Yes: what works in one country has been shown to work in the other. But what fails in one country also fails in the other. And the blunt truth is that in crucial respects Britain is now failing. The country’s palpable decline from its prosperity and security of just two decades ago constitutes an awful but, if intelligently observed, timely and useful warning to America.

The malaise which affected Britain in the 1970s was substantially worse than that which settled on the United States. Attention was focused on the concept of decline. The worry in the circles around Mrs Thatcher was that relative decline -- that is, the erosion of Britain’s place in the significant international economic league tables -- was continuing at such a rate that it would result in absolute decline -- that is, most obviously, in a real and continuing decline in GDP. The analysis was widely shared.

But Mrs Thatcher and her advisers broke company with the pessimists in believing that decline could be reversed, and that a complete change of direction in economic policy was the key to doing so. By the early 1990s, despite some setbacks, several policy errors and a recession, the scale of the changes had attracted a good deal of international attention. The British experience was being hailed as a model to be followed rather than, as previously, a fate to be shunned. Public spending as a share of GDP fell over the period. The large inherited budget deficit was cut year after year and became a budget surplus. Sixty per cent of the state sector of industry passed into private ownership. The Thatcher Government cut the basic rate from 30 to 25 per cent, and the top rate from 83 per cent to 40 per cent. Most important, productivity growth sharply improved, as new jobs in new industries replaced over-manning in old ones.

In 1997 Tony Blair promised to abide by the outgoing Conservative Government’s tight spending plans for his first two years, and did so. With the British economy growing against a favourable international background, this resulted in a reduction of public spending as a share of GDP to a recent historic low of 36.3 percent.

But upon the expiry of inherited plans, and facing an approaching second general election, with many Labour supporters unhappy with the Government’s record, the Prime Minister and Chancellor (Gordon Brown) sharply reversed economic course.

In 2005/6 British public spending stabilised. But trends at home were not the only worry. In the Thatcher/Major years, Britain stood out from the rest of Europe because of its small state sector, which was accompanied by lower taxes and lighter regulation. But now, with other countries, like Germany, trying to restrain spending, while Britain increased it, this advantage was lost.

The British financial crisis of 2007-2009 provided an occasion, and also an opportunity, for reversion to socialist type. The crisis, itself, was, contrary to Government assertions, initially home-grown. Then in the autumn of 2008 the full force of the global, rather than the domestically driven, financial storm hit.

The Government’s past had caught up with it. Mr Brown had no room for manoeuvre, within the limits of prudence. So prudence was abandoned. Public expenditure as a share of GDP is forecast to rise from 48.1 percent in 2008 to 54.1 percent in 2010. That is a higher figure than at any time since the highest spending year of the Second World War (1944), three percentage points above the Euro area.

The budget deficit in 2009/10, on British Government figures, is set to reach 12.4 percent of GDP. That is higher than for any other OECD member.

According to the IMF, Britain will have the fastest increase of debt of any G20 country between 2007 and 2014. There have been rumbles about the UK losing its AAA international credit rating.

The Government plans to curb debt by halving the budget deficit by 2013/14. This implies either very large cuts in spending, or a rise in taxes. Yet taxes in Britain are already much too high for the country’s good. The UK along with Japan levies the highest top rate of all the G8 countries. In recent years, countries have been bringing down top rates, as an economically healthy competition between tax regimes takes effect. Against this background, Mr Brown announced a new 50 per cent rate of income tax levied on income earned £150,000, applicable from April 2010.

The new penal marginal top rate, which the Conservatives will retain, makes no sense. The wealthiest ten percent in Britain already pay more than half the country’s total tax. It is extremely unlikely they will be prepared to pay more.

The Thatcher years had a profound effect on Britain, but not profound enough to expunge the legacy of socialist thinking. After she left office, the British political class relaxed and Britain itself reverted increasingly to the mentality which had dominated Britain in the post-War years. The so-called Welfare State, characterised by cradle-to-grave social provision and state monopoly, has never been finally discredited. It is the subliminally accepted goal of many, perhaps most, British politicians even today.

Superficially, these differences should be a source of relief, because the US, unlike the UK, has managed to escape socialism. But at another level, Britain’s experience offers a warning. It shows how difficult it is for another Anglo-Saxon country to escape the legacy of socialism, if that ideology once becomes entrenched in attitudes and institutions.

If, as is still likely, the Conservatives soon form a Government, they could take comfort from polling which suggests that most people would prefer public spending cuts to tax rises. But they have proved reluctant to go far down this route.

Tory timidity is understandable in electoral terms, because of the sheer size of the public sector and the number of individual voters dependent in one way or another on public spending – something that has large regional variations. Those most affected by talk of cuts are, of course, government employees whose numbers have grown at twice the rate of private jobs. What Sir Keith Joseph, Margaret Thatcher’s mentor, used to call the “ratchet effect” is plainly and damagingly at work. If the Conservatives, whatever they say before the election, do not make radical cuts in spending after it, the ratchet will shift further.

Margaret Thatcher and her colleagues were well aware of another reason beyond deficit management why public spending had to be curbed: it was to make room for tax cuts. Without low taxes, economies do not enjoy healthy growth. Without that growth, the only way in which popular expectations can be fulfilled is by redistributive policies, which further slow growth and also -- when they reach confiscatory levels -- imperil a free society.

It should be added that if economic growth remains anaemic, defence cuts could be such as to prevent Britain’s being an effective military ally to the Unites States. America has a strong interest in seeing that its old ally gets back on track.

America has, though, a still stronger interest in avoiding going down a similar route. Unfortunately, early signs are not encouraging. The US is already close to the UK among G 20 nations in its forecast debt increase. The present Administration seems no less enthusiastic about spending its way out of recession than the British Government. Anyone who seriously wishes to see where current programmes of massive spending will lead the US economy and American society need only study what has happened in Britain. High taxes and low growth are the inevitable outcome, with a return to high inflation as a real possibility as government struggles to find ways to pay off its debt.

Of course, the US is not a mirror image of Britain. Above all, the US has, as observed earlier, no history of socialism. That is an advantage -- but not an unqualified one, because Americans have, as a result, fewer bad memories to recoil from. For the British, the danger is that by historically conditioned reflex they revert to collectivism. For Americans the risk is different, but real: it is that they may gently and unwittingly slip into it.



Mr. Harris was a member of Prime Minister Margaret Thatcher�s Policy Unit and is now Senior Visiting Fellow at The Heritage Foundation.

First Appeared in Human Events

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