June 30, 2010

June 30, 2010 | Commentary on Economy, Federal Spending

Osborne Has a Long Way to Go, But At Least He's Started

ACCORDING to the Left, there is never a good day to cut government spending. When the economy and tax revenues are growing, the Left wants to spend more because it can. When the economy is stagnant and tax revenues are shrinking, the Left argues it has no choice but to spend more, in order to cushion the blow.

The result is that progressive governments transfer money from savers to spenders, from the productive economy to the unproductive state, and from the unborn to the living. For progressive governments, the economy is a goose that will keep on laying golden eggs, no matter what they do to it.

This view is nonsense: there is a lot of ruin in a modern economy, but bad policies do hurt. And over time, the poor are the ones who are hurt the most, precisely because it's the poor who have the most to gain from growth. Over the long run of history, it is the private sector, not the public one, which has done most to improve our lives. Even the poor today live in luxury unimaginable to the rich 100 years ago. And while the poor of a century from now will certainly be with us, they will also be far better off than we are today. Unless, of course, we kill the goose by demanding so much comfort and safety from the state now that we choke the economy to death.

The great virtue of George Osborne's Budget is that, as The Economist recently put it, it "shattered and reversed the orthodoxy, which took hold in the last decade, that public spending must grow eternally". That itself is a pathetic epitaph for Gordon Brown, who will be remembered not as the Iron Chancellor but as a failed Lady Bountiful.

But while the coalition has begun well, it has much more work to do. The cuts Osborne promises are substantial, but many of them will fall on the public services. Every department will be only too glad to shove the others to the front of that queue. It will be difficult to reconcile the coalition's pledges on health, overseas development aid, and defence with the cuts it has promised to find.

Still, this is fundamentally a short term problem. It was not long ago that Britain balanced its budget, and with the right mix of economic growth and spending restraint, Britain can do it again. The real challenge rests in the long term. As tough as Osborne's Budget was, it is really nothing more than a rolling up of the shirt sleeves: he's not even started on his real job. The real job is that, going forward, Britain is still promising to pay off far more bills than it can afford to meet. The official national debt we already know is huge, but then there are the state pensions, which the Office of National Statistics admits are "in effect unfunded". You can throw in the unfunded liabilities of the public sector pensions, rising every year, as well as payments to be made on Private Finance Initiative schemes. And what if Lloyds and RBS go south? And there is the cost of the National Health Service, which, like a fat man who persists in wearing his schoolboy pants, will sooner or later explode through any conceivable ring-fencing.

Some of these problems are unique to Britain: the US, for example, has no real equivalent of the PFI scheme. But in the main, Britain's problems are the standard ones: an aging population, an overpaid and overpromised public sector, and a refusal to acknowledge that future obligations do not stay in the future forever.

But still, as an American, I would rather be in Britain now. At least the British political system is beginning to come to grips with the problem. Osborne has taken only a step in a journey of a mile, but it is a step. In the United States this year, the House of Representatives has failed in its most basic duty: it has not even been able to adopt a budget.

The reason for this is simple and shameful: liberals want to spend, but recognise that adopting a budget would reveal the scale of their spending and hurt them politically. As House Majority Leader Steny Hoyer put it in May, "It's difficult to pass budgets in election years because they reflect what the (fiscal] status is."

This is head-in-the-sand leadership that would make an ostrich proud. Unless you're a politician seeking re-election, the problem is not that the public might find out how badly off the US is. The problem is that the US is actually badly off. Like the UK, the US has got both a short term and a long term problem, and of these, the long term one will be far more difficult to address, because it is composed of promises made that we cannot afford to keep.

And that is why Osborne's Budget is such an important lesson for America. He still has an enormous job ahead of him. But in cutting back on the state now, he is fixing future problems before they are made. Every day the British state continued to grow built another mountainous range of unaffordable promises. Right now, the US is still building those mountains. The longer we wait to learn Osborne's lesson, the harder it will be to flatten them.

Ted Bromund is a senior research fellow at the Margaret Thatcher Center for Freedom, based at The Heritage Foundation in Washington.

About the Author

Theodore R. Bromund, Ph.D. Senior Research Fellow in Anglo-American Relations
The Margaret Thatcher Center for Freedom

First appeared in the Yorkshire Post