The Great Debate UK

from Reihan Salam:

Does Britain’s austerity hold lessons for the United States?

The dog’s breakfast of a deal that “resolved” the fiscal cliff fell far short of expectations. In the hours after it passed, deficit hawks at the Committee for a Responsible Federal Budget and the tag team of former Senator Alan Simpson and former Clinton White House chief of Staff Erskine Bowles all expressed disappointment in a bargain that was anything but grand. Senate Republicans gritted their teeth to accept a small increase in taxes on America’s highest-earning households while Senate Democrats made permanent the bulk of the Bush-era tax cuts. A number of tax provisions that hark back to the 2009 fiscal stimulus law were extended, as were unemployment benefits, thus delivering a modest income boost to a large number of low-income households. But the Social Security payroll tax cut, a Republican-backed replacement for the more narrowly targeted Making Work Pay tax credit that was part of the stimulus law, which benefited a wide range of affluent households as well as families of more modest means, was allowed to lapse. Long-term spending levels, meanwhile, were left largely untouched, which is why rebellious House Republicans came close to scuttling the delicately constructed compromise.

One group that offered at least two cheers for the deal were deficit doves, who believe that premature fiscal consolidation poses a grave threat to America’s sluggish economic recovery. Paul Krugman, the prominent economist and popular left-of-center New York Times columnist who never shrinks from apocalyptic pronouncements, was almost pleased to see that the deal avoided any serious spending cuts and that it entailed relatively modest near-term tax increases.

There is a coherent approach to reconciling the concerns of deficit hawks and doves, which has been championed by former Senator Pete Domenici and former Clinton budget director Alice Rivlin of the Bipartisan Policy Center’s Debt Reduction Task Force. Essentially, it entails addressing the federal government’s structural budget deficit -- the gap between revenues and spending levels when the economy is humming along at its “normal” pace -- while allowing for substantial deficits so long as the economy is in recovery mode.

There is one market democracy that has embraced something like the grand bargain American budget reformers have in mind, yet it has been widely panned as a poster child for the evils of fiscal austerity. Since 2010, Britain has been ruled by a coalition government that unites the center-right Conservative Party with the center-left Liberal Democrats. Faced with a tanking economy and a budget deficit of 11 percent of GDP on entering office, and constrained by public spending levels that reached 47.7 percent of GDP under the previous Labour government, the coalition committed itself to a course of slow and steady deficit reduction. The hope was that this fiscal consolidation would signal that Britain was serious about getting its public finances under control, and that this in turn would encourage growth. Yet Britain’s economic performance has been disappointing, and a growing chorus of critics insists that fiscal consolidation is to blame.

from MacroScope:

The Law of Diminishing Greeks

The Law of Diminishing Returns  states that a continuing push towards a given goal tends to  decline in effectiveness after a certain amount of effort has been expended. If this weren't the case, Usain Bolt would be able to run the mile in  less than 2-1/2 minutes.

From an economic standpoint, this law now seems to be fully in force in Greece. The latest jobs figures from the twice-bailed out euro zone country paint a bleak numerical picture of the impact of unrelenting austerity in ordinary Greeks, regardless of whether it was self-inflicted or not. To wit:

The U.S.’s big, fat political debt problem

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USA-BUDGET/By Kathleen Brooks

The U.S. has practically zero chance of solving its debt problem in the foreseeable future while politicians line up to contest the 2012 Presidential elections.

We have already heard President Obama lay out his partisan cards. He called for Congress to come up with a plan to trim $4 trillion from the U.S. deficit in the next 12 years. His favoured way to do this: end tax cuts for the rich – a well versed refrain from Democrats throughout the ages.

George Osborne and the band-aid effect

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BRITAIN-BUDGET/The second budget presented to Parliament by Chancellor George Osborne is likely to be less talking and more doing when it comes to bringing the UK’s public finances under control.

This won’t be to everyone’s tastes. Some argue that the UK is in less financial danger than Europe’s financially troubled states, yet Osborne is embracing deficit reduction plans with as much gusto as Ireland or Greece.

from The Great Debate:

Obama, Moses and exaggerated expectations

-Bernd Debusmann is a Reuters columnist. The opinions expressed are his own-

President Barack Obama is close to the half-way mark of his presidential mandate, a good time for a brief look at health care, unemployment, war, the level of the oceans, the health of the planet, and America's image. They all featured in a 2008 Obama speech whose rhetoric soared to stratospheric heights.

"If...we are willing to work for it, and fight for it, and believe in it, then I'm absolutely certain that generations from now, we will be able to look back and tell our children that this was the moment when we began to provide care for the sick and good jobs for the jobless; this was the moment when the rise of the oceans began to slow and our planet began to heal; this was the moment when we ended a war and secured our nation and restored our image as the last best hope on earth."

from Global News Journal:

Ireland’s boasts come home to roost

Irish Finance Minister Brian Lenihan

Irish Finance Minister Brian Lenihan

Irish literature and legend is full of boasts, like the claim by Christy Mahon in Synge's "Playboy of the Western World" that he has killed his da with a loy (Irish for spade), only to have the old man track him down in another town.

Perhaps that's the way to view Irish Finance Minister Brian Lenihan's announcement two years ago that the state-backed guarantee scheme to rescue the country's troubled banks, hit hard by the collapse of the property market, was "the cheapest bailout in the world so far".
 
It seemed too good to be true. And it was.
 
On Thursday, Lenihan, who has spent the last two years scrambling from one fiscal crisis to another, announced that, actually, the cost for cleaning up years of reckless lending was "horrendous" and in a worst-case scenario the price tag would be over 50 billion euros ($68 billion).
 
The bill will shackle Ireland, once the EU's fastest growing economy, with a public debt burden of nearly 99 percent of gross domestic product.
 
Ireland's now crippled economy, meanwhile, has done everything but recover. Unemployment is stubbornly high, property prices remain depressed,  taxpayers face years of cutbacks and, in the second quarter, growth again went into reverse.
 
What happened?
 
Maybe what Lenihan said two years ago was wishful thinking, or perhaps it has taken this long for Ireland to wake up to just how colossal a hole its one-time high flying property tycoons have dug for themselves, and for every Irish taxpayer, even though much of what they were up to is so big as to be unmissable.
 
Take, for example, the Battersea Power Station in London, which is Europe's largest brick building and has been derelict since it was decommissioned as a coal-burning power plant about a quarter century ago.
 
In 2006, a firm controlled by two Irish property magnates, Johnny Ronan and Richard Barrett, bought the building and land surrounding it for a staggering 400 million pounds ($750 million) -- even though previous plans to develop it had all come to nought.
 
The boys, as they are referred to in some of the Irish press, had ambitious plans for a new, exclusive, "Knightsbridge"-class development for office, commercial and residential space, including an extension of the Northern Line branch of the London Underground.
 
Four years later, the site is still derelict, promoted, perhaps a bit desperately, as a location for lavish weddings held inside a marquee, and most recently as the venue for a Red Bull-sponsored high-jinx, daredevil motorcycle show.
 
Ronan and Barrett's property empire, meanwhile,  has seen some of its loans  earmarked for the Irish government's National Assets Management Agency (NAMA) -- Ireland's "bad bank scheme", which was  established to purge lenders of commercial property loans, many of them non-performing. 
 
Battersea is at the top end of the scale of Irish property investment during the decade of the Celtic Tiger boom, but replicate it at a lesser level all the way from Eastern Europe to the holiday beaches of Spain and out to Asia, and it becomes clear why Lenihan has had to change his tune.
 
A historical footnote: a Reuters feature informs us that the Battersea Power Station was used during World War Two to burn 120 million pounds worth of banknotes that had to be disposed of to stop enemy forgeries.
 
Something to boast about then. Comparatively small change now.

EU stress tests: for banks or governments?

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- Laurence Copeland is a professor of finance at Cardiff Business School. The opinions expressed are his own.-

Worries about Europe’s banking system go back at least to 2007, but whereas the U.S. (and UK) banks appear to have weathered the storm, there are fears that for European banks the worst may lie ahead.  Concerns centre on four areas.

Osborne’s book-balancing a risky venture

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-Tony Cleaver is senior teaching fellow in Economics and Finance in the Durham University School of Economics, Finance and Business. The opinions expressed are his own.-

George Osborne is taking a risk.

The Chancellor is also placing himself firmly in the orthodox school of financiers who assert that governments must balance their own books even in times of recession.

Roger Bootle analyses the potential impact of the budget

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London-based Roger Bootle, director of Capital Economics and an advisor to business accountancy firm Deloitte, shares his thoughts on what Chancellor George Osborne’s budget may hold and its long-term effects on the economy.

Bootle suggests the coalition government must narrow the deficit for this year and give confidence to the markets that something will be done longer term to restore the economy to health.

Entrepreneurs needed if the UK is going to make up the deficit

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-Joe White is managing director of Moonfruit.com. The opinions expressed are his own. Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-

The first Tory budget is a critical one. The Treasury and Chancellor George Osborne have been dropping hints for weeks about a big slash in public sector spending in an effort to try and prepare Whitehall for the worst, and to rally the private sector to step in and fill the deficit.

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