Britain Austerity Plan

This week I am going to talk about Britain’s austerity plan. I knew that Britain was facing problems with deficit in the budget, but I was not aware of the details of the plan, which is very drastic.

The plan

The Chancellor of the Exchequer, George Osborne will make many cuts in the government’s budget.

The Chancellor is going to increase the VAT from 17.5% to 20% in January. The Treasury will raise by more than £12bn with this measure. Mr Osbourne will cut a large range of benefits, including family tax credits and housing benefits. There will be a freeze on child benefits during three years. The government will scrap child benefit, starting by 2013 for households where either of the parents earns over 44,000 pounds a year.

The government plans to save almost £6bn a year by linking all state benefits, except pensions to the slower-growing consumer prices index rather than the retail prices index.

There will be 500,000 public sector jobs lost and government staff will have a two-year public sector pay freeze, for those earning over £21,000 a year, which represents about £28.5bn saving out of the welfare payments. Mr Osborne said that the state pension age for men and women will rise to 66 by 2020, which is a quicker step as the initial program.

Even Queen Elizabeth II will be affected by these hard measures, her budget; provided by the government for her staff will be reduced by 14 percent. The traditional Christmas party, the Queen holds every two years has even been cancelled, as she said to believe it to be an ‘inappropriate’ spending these hard times.

Rich people will be severely affected by a big tax increase. For example, those who earn more than £1million a year will pay 23 percent more in tax because of the introduction of the new 50 percent higher tax rate. They will add a 28 percent to the capital gains tax.

BBC’s budget will also be reduced by 16 percent.

This chart shows the budget’s difference between 2010-2011 and 2014-2015

 Source : The Economist

Consequences

The increase of taxation and the economy including lower spending policies are designed to reduce Britain’s deficit from 10.1% of national output to 1.1% within five years. The reduction of spending cost will represent £83bn by 2015. The budget measures are designed to turn a structural deficit, about £156bn in current spending of 4.8% of GDP into a 0.3% profit within four years. This is an attempt to make government and the economy more efficient but there are some risks that will be discussed later on.

Reasons

The British government fears to be in the same situation that Greece and to lose investors’ confidence, UK would then face troubles to repay their high interest rates they have on the money they borrow. Last month, some other countries from the euro area; Spain and Ireland had some financial problems that were revealed.  The result was degradation in their rating and high interest rates to finance their borrowing.

For the Chancellor, the measures are essential, without which he predicts higher interest rates, more business failures, sharper rises in unemployment and a catastrophic loss of economic confidence, which would lead to an impossible economic recovery.

My opinion

The OCDE and the IMF have told that this plan was very positive in the long term. I have a different perspective.

1) The high level of taxes is very unattractive for investors. And I think that a lot of people, who are extremely rich, will move out of England because of the new taxes.

2) The huge reduction in the government staff will need to be compensating with a large increase in the number of new work places in the private sector. As mentioned, investors are not attracted by high taxes. So it will be more difficult to create new jobs and the country is still instable and fragile, because it is in recovery.

3) The reduction of the spending costs in the government and the diminution of social benefits will reduce the purchasing power of Britain. So they will spend less and the economy could face a new recession.

To me, these measures are very courageous, but there are too hard and too fast. I think that in the coming years there will be a decrease of the purchasing power, higher unemployed rates and slow growth of the GDP. I do not exclude that the plan could work, but if millions were to be speculated, I would bet all my money on a big decrease of Pound to Swiss franc.

My solution for the spending costs would be as follow; knowing that nowadays conflicts settle more on talk than on military power, Britain could lower its defence budget. A simple decision to take that would save billions, but which is difficult to do, is making British troupes leave Afghanistan and Iraq, because these wars costs billions to the tax payer and I cannot see any profit there for Britain.