Opinion

Anatole Kaletsky

Learning budget lessons from Japan and Britain

Anatole Kaletsky
Oct 10, 2013 14:55 UTC

While the world is transfixed by the U.S. budget paralysis, fiscal policies have been moving in several other countries, most notably in Japan and Britain, with lessons for Washington and for other governments all over the world.

Let’s start with the bad news: Shinzo Abe’s decision to increase consumption taxes from 5 to 8 percent next April. This massive tax hike, to be followed by another increase in 2015, threatens to strangle Japan’s consumer-led growth from next year onwards, since Abe looks unlikely to offset this massive fiscal tightening with stimulative measures that would maintain consumers’ spending power. Even if Abe delivers on his vague promise to compensate with business tax reductions, these will only aggravate the over-investment and corporate cash hoarding that have long distorted the Japanese economy. Meanwhile, the government’s willingness to risk economic recovery in the cause of fiscal discipline implies that those of us who believed Abe was making an unconditional commitment to do whatever it takes to achieve economic recovery were simply wrong. Now that the forces of budgetary austerity have reasserted themselves, Japan’s probability of ending its decades of stagnation is much reduced.

Now for the good news: a change of attitude to debt and borrowing is transforming Britain from the second-weakest G7 economy (after Italy) into a world champion of growth. As recently as last April, the British government was attacked by the International Monetary Fund’s chief economist for “playing with fire” by trying too hard to reduce its budget deficits. This week the IMF World Economic Outlook praised Britain’s rapidly improving economy and upgraded 2013 growth projections by 0.5 percentage points, to 1.4 percent. That may not sound like much, but this improvement comes when almost every economy is being downgraded — and compared with last year’s miserable 0.2 percent growth rate, it feels almost like a boom.

Does this experience prove that David Cameron was right to persist with his unprecedented program of spending cuts, tax hikes and fiscal austerity? The answer is no, for two reasons.

First, the British government, despite its tough fiscal rhetoric, has actually relaxed its efforts at deficit reduction and has effectively abandoned its commitment to balanced budgets. In 2010 and 2011 Britain’s structural deficit was slashed by 4.3 percent of GDP, by far the biggest fiscal tightening in any major economy. In the next two years, 2012 and 2013, the pace of deficit reduction has halved to just 2 percent, and according to the IMF’s latest analysis there will be no further tightening at all in 2014. So instead of a near-balanced budget, Britain will next year still have the biggest budget deficit among the advanced Western economies: 5.8 percent of GDP, against 4.6 percent in the U.S., 3.5 percent in France and 2.1 percent in Italy. Thus Britain’s better growth performance, far from demonstrating the wisdom of relentless budget cuts, has actually reflected an easing of fiscal austerity and a belated acceptance of much wider deficits than European and U.S. politicians seem willing to tolerate.

Would Romney be better for Europe?

Anatole Kaletsky
Nov 1, 2012 11:51 UTC

Looking at the opinion polls, there is no contest for which of the presidential candidates would be better for Europe. In a survey published this week by U.K.-based YouGov, 90 percent of European voters said they would support Barack Obama over Mitt Romney. But does this lopsided support correspond to the true interests of Europeans?

The numbers are not entirely surprising. The Republican stance on emotive social issues such as abortion, healthcare and environmental protection create an almost unbridgeable cultural divide for many Europeans. On foreign policy, there are understandable fears in Europe that a Romney administration would downgrade the United Nations, increase the risks of war in the Middle East, or possibly provoke confrontations with Russia over Georgia or NATO enlargement.

However, if we focus on the issues that are preoccupying Europeans now en masse — global economic stagnation and the deepening euro crisis — then we reach a different conclusion. Maybe Europe should root for Romney, despite his social views.

To escape the Great Recession, embrace contradiction

Anatole Kaletsky
Oct 18, 2012 16:39 UTC

Where will jobs and growth come from? As we enter the fifth year of the Great Recession, people all over the world are asking this question, but their political leaders are not providing any convincing answers, as has been made obvious in the U.S. presidential debate and the European Union summit this week.

The second presidential debate started with Jeremy Epstein, a 20-year old college student, pointing out that he had “little chance to get employment” and asking the two candidates for some reassurance and an explanation of how this would change. Mitt Romney offered lots of reassurance but not much explanation:

“I want you to be able to get a job. I know what it takes to get this economy going. I know what it takes to create good jobs again. I know what it takes to make sure that you have the kind of opportunity you deserve. When you graduate … in 2014, I presume I’m going to be president. I’m going to make sure you get a job. Thanks, Jeremy. Yeah, you bet.”

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