Politics & Policy

Lessons from London

The British Tories have demonstrated how a newly elected party can deliver a program of radical spending cuts.

Deficit hawks are flying high in Washington.

With rediscovered virtue, Republicans are vowing to rein in government spending and cut the deficit. Incoming House speaker John Boehner argues that voters want “a smaller, less costly” government, while Republican senator-elect Pat Toomey says that “the government has overreached dramatically. . . . Spending has been wildly excessive.” Even Democrats are singing a new tune, with Senate majority whip Dick Durbin saying that his party will be looking for compromises: “We’re going to be giving on spending, I’m sure.”

#ad#But restoring fiscal sanity won’t come easily. The Republicans’ $100 billion in promised spending reductions will hardly make a dent in last year’s $1.29 trillion deficit. To make a difference, would-be cutters will have to convince a skeptical electorate — polls consistently show that most substantial, specific spending cuts are unpopular — and navigate a treacherous two-year electoral cycle.

Across the Atlantic, however, the British Tories have demonstrated how a newly elected party can deliver a program of radical spending cuts. The coalition government, led by Conservatives and supported by Liberal Democrats, aims to cut spending by £81 billion and departmental budgets by 19 percent over five years, eliminating the U.K.’s structural deficit. It is a strikingly bold plan: An estimated 500,000 public-sector jobs will be lost; higher-education spending will be reduced by 40 percent; and departments will be cut by up to 51 percent.

These dramatic cuts illustrate the kind of action the U.S. will eventually have to take. The U.K.’s fiscal context is roughly analogous to America’s: The current budget deficit totals 11 percent of GDP in the U.S and 10 percent in the U.K., while the national debt is 66 percent of GDP in the U.S. and 69 percent in the U.K. (2010 figures). In many ways, however, the Conservatives’ success at tackling the deficit illustrates the roadblocks that Republicans face en route to implementing such policies.

Throughout their recent election campaign, the Conservatives claimed that failure to deal with the deficit would lead to a Greek-style meltdown. They could credibly point to a nearby country with similar deficits and argue that a sudden spike in U.K. bond yields could cause a vicious spiral. In Prime Minister David Cameron’s words, “Greece stands as a warning to what happens if you don’t pay back your debts.”

This clear and present danger generated a broad consensus among political parties about the importance of fiscal consolidation. The leader of the traditionally left-leaning Liberal Democratic party acknowledged the need for “savage cuts” in public spending, and even the Labour government set out plans to reduce public spending (albeit slowly and with significant tax increases).

#page#Republican deficit hawks, however, have no such external allies. While Greece faced interest rates of upwards of 12 percent on ten-year bonds, similar U.S. Treasury notes hover at 2.5 percent, near record lows. James Carville’s bond-market vigilantes are nowhere to be seen.

The markets, of course, give the U.S. tremendous short-term leeway for fiscal irresponsibility simply because the dollar is the world’s reserve currency. And the Fed’s reckless QE2 policy promises to further depress bond yields through the purchase of $600 billion in Treasury bills. Likewise, currency manipulators like China keep U.S. bond yields artificially low as they continue buying T-bills with accumulated surpluses.

#ad#As a result, U.S. bond yields don’t reflect the actual danger posed by America’s unsustainable deficits. This only delays the day of reckoning, but for now it enables our politicians to avoid making difficult decisions. So whereas British Conservatives could use the Greek tragedy to build a broad public consensus around the need for fiscal consolidation, complacent bond markets make American deficit hawks sound like Chicken Little.

The example of Greece enabled the Conservatives to depict spending cuts as a matter of necessity, not choice. Like Americans, Brits support spending reductions in theory, but vengeful rhetoric about drowning the government in a bathtub doesn’t appeal to the middle ground. That is why David Cameron rarely sells spending cuts as an inherently good thing (shrinking a bloated, inefficient state). Instead, he argues that “there is no alternative,” casting austerity as a painful necessity rather than an ideological decision. And under the slogan “We’re all in this together,” the Conservatives have consciously tackled middle-class benefits — an issue Republicans show no interest in addressing — alongside easier targets like welfare.

Perhaps more important, the Conservatives won’t be facing an election just as spending cuts bite. With another general election not expected until 2015, the luxury of a five-year political cycle enables the Conservatives to front-load spending reductions and (hopefully) offer tax cuts ahead of the next election. Government grants to local councils, for example, will fall by 17 percent in the first two years, but by only 6.5 percent over the two years before the next election. In other words, the U.K. Conservatives can make hard, unpopular decisions now and reap the benefits in time, whereas the Republicans would probably have to risk a midterm shellacking to do likewise.

Even with this breathing space, the Conservatives will face significant opposition from vested interests and left-wing activists. But here again, the parliamentary system confers a structural advantage on the party. Any bold Republican deficit-reduction plan would have to make compromises with Democrats to clear a Senate filibuster. The Conservatives, on the other hand, have a clear majority in Parliament — admittedly through a deal with the Liberal Democrats — enabling their leaders to take radical action without concessions to their own backbench MPs or to Labour.

So Republicans can draw inspiration from the Conservatives’ success, but replicating it will depend on setting out a broad-based, non-ideological approach to fiscal consolidation — less Grover Norquist, more David Cameron. And even then, it is hard to see how the GOP will be able to overcome America’s structural barriers to implementing a sound fiscal policy.

Piotr Brzezinski is COO of the Big Society Network and a former policy adviser to the Conservative-party leadership at the Conservative Research Department.

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