Great Britain recently held elections which resulted in a takeover by a Conservative-Liberal Democrat coalition. It turns out that this new government is actually taking steps to reduce, you read that right, reduce its deficit. In an unheard of move, Britain is cutting government spending by about $140 billion and raising taxes to increase revenues by another $40 billion.
The spending cuts will concentrate on social programs: means testing disability benefits, placing limits on housing benefits, and keeping child benefits at the same levels for the next three years. Britain will also freeze all government salaries that are above $31,000 per year. The taxes that will be raised are value added taxes (VAT), which will go to 20%, an increase of 1/7 from the current amount. VAT taxes are used throughout much of the industrial world. They work by taxing the market value added at each level of production.
Earlier this month, President Obama strongly urged the G-20 nations to avoid fiscal tightening and continue their stimulus programs. He claimed that when stimulus plans historically are stopped too quickly, double-dip recessions are more likely to occur. This move by Britain is an indication that these governments are ignoring Obama’s plans. Germany and France are signaling that they are likely to follow suit within the next few weeks.
In a shocking move, the finance minister said, ‘The failures of the banks imposed a huge cost on the rest of society. So I believe it is fair and it is right that in the future banks should make a more appropriate contribution, which reflects the many risks they generate.’ He then announced that most banks will pay a special tax that will also provide revenues to the government.
So, let’s review the unheard of things that the new British government is going to do. First, they will cut discretionary spending. Second, they will raise taxes. Third, they will punish the firms who caused the recession. What kind of government would act in such a bizarre way, merely because the deficit is out of control? Our system is a lot better. We keep increasing spending, cutting taxes, and never have anyone pay for their mistakes.