The Great Debate UK
The news that China is engaged in talks over the building of a rival to the Panama Canal ought to set alarm bells ringing in Washington – and not just because of its obvious geopolitical implications. It is yet another sign that the Chinese have finally woken up to the fact that relending their hoard of dollars straight back to the USA is not a very smart policy, at least not as long as the Federal Government carries on spraying out greenbacks like a tipsy GI on furlough, and without Chinese support, the outlook for the Treasury bond market looks threatening.
Those who argue that it is a bad time for imposing austerity should be ignored – in the good times there was no sense of urgency, and in any case deficit reduction has to be a multiyear project. The Federal deficit is running at over 10 percent of GDP and the projections for the coming decade on unchanged policies are too frightening to contemplate.
That is the background to the Obama budget – in qualitative terms, it is very similar to the scenario faced by Britain’s new Coalition Government when it came to power last May. What lessons can America draw from the UK experience?
One caveat needs to be made at the outset. Since the mills of government grind slowly, the full impact of Britain’s austerity budget is only just beginning to be felt, so some judgements may be a little premature. However, start with Britain’s mistakes. It was a gross error to ringfence any spending items – and the choice of the National Health Service and Overseas Aid as protected species was particularly perverse, not least because it left the defence budget to sustain a sizeable cut while the country is still at war. America should nominate no sacred cows. The burden of the cuts has to fall overwhelmingly on the big spending programs: social security, Medicare and Medicaid, and defence.