‘Tax and Axe’ Europe challenges Obama strategy
July 15, 2010
By Peter C. Glover
UK Correspondent
Troy Media
Peter Glover
LONDON, UK, July 15, 2010/ Troy Media/ – Is it the irony of ironies? While ‘socialist’ Europe increasingly adopts economic austerity measures, the Obama White House continues to pursue a diametrically opposed economic trajectory, taking ‘capitalist’ America further down the path of Keynesian high public spending and further market intervention.
As Erskine Bowles, co-chair of the president’s debt and deficit commission, was calling the current US budgetary trends a “fiscal cancer” that “will destroy the country from within”, the major EU economies were queuing up to raise taxes and pull the plug on national public spending programs.
‘Tax and Axe’ Britain
It was former UK PM Gordon Brown’s Keynesian philosophy that first set the international stimulus ball in motion. But Britain’s coalition government has lately joined the ranks of those in Europe calling a halt, with what the London Evening Standard termed a ‘tax and axe’ budget.
Just a month after May’s election, new Chancellor of the Exchequer George Osborne announced to Parliament a £40 billion (US$60bn) package made up of £32 billion (US$48bn) of spending cuts and £8 billion (US$12bn) in tax rises. According to the European Commission, the moves would help bring down the UK deficit to 2.3 per cent of gross domestic product by 2014-15, in line with European guidelines.
The Chancellor’s targets included a freeze on public sector pay currently running at 30 per cent on average above private sector levels. Osborne also signalled a reining in of “generous” public sector pensions as well as an acceleration of the previous government’s plan to increase the retirement age up from 65 years. Changes to Capital Gains Tax, an increase in Value Added Tax from 17.5 to 20 per cent and a new annual bank levy from January 2011 is also expected to generate more than £2 billion (US$3.5bn) a year.
EU snapshot
Elsewhere in Europe the public sector was taking it on the chin, too. In June, following on the heels of the Eurozone’s Greek economy crisis – ignited when Germany made it clear it would no longer pick up the tab for Europe’s profligate socialist southern states – Angela Merkel’s government, faced with a deficit of over 86 billon euros (US$108bn) this year, announced plans to cut Germany’s domestic budget by 80 billion euros (US$100bn) by 2014.
The German Government plans to axe 15,000 jobs from the federal payroll and scale back tax subsidies, including exemptions from environmental taxes. Merkel’s administration calculates that the package is the first necessary step to bring the budget deficit back under the EUs stipulated limit of three per cent of GDP.
France too is targeting massive public spending cuts in the face of its own burgeoning deficit running currently at 100 billion euros (US$125bn). Given the population’s penchant for national strikes in the face of cuts however, the prospect of rolling back France’s highly generous public sector pay and pensions is likely to prove difficult, especially in a country with an average retirement age of 60. The cuts are aimed at bringing the national debt down from eight to three per cent by 2013. A recent French poll ominously revealed 57 per cent oppose the government plan.
In May, Spain and Italy announced plans to cut their deficits by 15 billion euros (US$19bn) and 25 billion euros (US$31bn) in 2011-12, respectively. Passed by just a single vote (169 to 168), Spain proposes to cut five per cent from civil service pay, freeze pensions and reduce public investment spending – subsidies. Spain’s deficit, currently running at over 11 per cent of GDP, has been a cause for real concern in Brussels.
In Italy, the government is proposing the imposition of a three-year public sector pay rise freeze, introducing progressive pay cuts for public sector high earners, and reducing funding for city and regional governments. Its national debt currently stands at well over five per cent of GDP.
Europe’s challenge
Speaking to Troy Media, Carlo Stagnaro, Research and Studies Director with the pro-free market Italian think-tank Istituto Bruno Leoni, explained, “The EU is pursuing an austerity path because there is no other realistic option. Most European countries – especially in the “old” Europe – are maintaining huge welfare states that are financed by taxes and public debt. The sovereign debt crisis has undermined the presumption that sovereign debt is always ‘safe’ ”. He added, “If Europe can teach something to the US it is exactly that unchecked spending does not result in any significant net benefit, as we are witnessing in Europe”.
For some, however, a double-dip recession still remains a danger. A spokesman for the UK’s Standard Chartered Global Research observed, “Premature policy tightening is one key factor that could trigger a double-dip. The recent G20 meetings, where leaders spoke globally but acted nationally, reinforced this worry.”
Meanwhile, World Bank president Robert Zoellick, in the Washington-based organization’s Global Economic Prospects 2010 report, did not rule out a double-dip recession but for the very opposite reason. Zoellick believes economic collapse could happen again if investor confidence was derailed because of the sheer level of sovereign debts. It is the fear of the loss of investor confidence because of high public debt that appears to have won the argument in European capitals – if not in Washington.
Britain and other European states have, albeit inadvertently, laid down a challenge to President Obama. By wanting yet more stimulus spending, Obama has, again ironically, chosen a ‘Bush-esque” path of US international (economic) isolationism. With US debt currently running at a massive 13 per cent of GDP, and with his own debt and deficit commission cued to broadside his chief economic policy in December, it’s a ‘brave’ call. A call on which his bid for a second term will surely hang.
Channels: The Moncton Times & Transcript, July 20, the Flin Flon Reminder, Aug. 18, 2010
