American Wusses, Try Some UK Fiscal Machismo

♠ Posted by Emmanuel in at 11/03/2010 12:09:00 AM
And now for some commentary on little girlie man economics favoured by a lot of Americans nowadays, including a certain commentator for the New York Times. On the 21st of last month, the rather polarizing American economist Paul Krugman predicted the worst for Britain's bludgeoning budget cuts administered by the coalition government. That such massive cuts are being pushed by an alliance of parties nominally at opposing ends of the political spectrum on several issues suggests that there is public support for such cuts despite (several) isolated pockets of discontent. For some kicks, let's quote Krugman's conclusion on the so-called "fashion" for austerity:
What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.
My goodness, we're all done for here in Britain! I'd better pack my bags and search for greener pastures, right? Well not quite. A few days later on the 26th, the UK's Office of National Statistics indicated that in Q3 2010 the British economy grew by 0.8% quarter-on-quarter or 3.2% on an annualized basis. The latter compares rather favourably to the performance of Krugman's own deficit-happy nation that only managed a 2% annualized rate of growth despite massive helicopter droppings. The Economist points out that while the bulk of the cuts will commence in April of next year, it's certainly a good omen that the UK economy isn't losing momentum as tightening has begun (contrary to what certain prognosticators say):
What this means is that the economy has now been growing for half a year at a sustained rate of 3.2% on an annualised basis. That is almost a percentage point higher than the trend rate of output growth, which the Office for Budget Responsibility, the body now responsible for official forecasts, puts at 2.35% a year. As a result, the economy is starting to close the output gap (between actual and potential GDP) that opened up in the recession; the OBR reckoned that spare capacity was around 4% of trend output at the end of 2009.
Moreover, the employment picture isn't too shabby either:
Despite the warning signals from business surveys, the continued strong GDP growth is consistent with the big rise in employment in the three months to August (compared with the previous three to May) reported by the ONS on October 13th. The number of people at work rose by 178,000 and among those aged 16-64 the employment rate increased from 70.5% to 70.7%.

The new GDP figures are a fillip for both the chancellor and David Cameron who have been anxious to show that they have other things on their minds – above all growth – than cutting the budget deficit. Indeed the prime minister gave a speech yesterday about how the government would promote growth. Of course this report on the economy show how it has been faring before the big spending cuts get under way. But the fiscal retrenchment has been well signalled and households and firms should already be bracing themselves for both spending cuts and tax rises. The economy is heading into the fiscal consolidation with more momentum than had been expected, which suggests that fears of a double dip recession have been overdone.
At least for pound earners who will have to repatriate earnings sooner or later like yours truly, the strengthening pound indicates improving sentiment towards sterling that should come in handy soon. In essence, expectations are that the Bank of England won't unleash Fed-style aerial bombardments:
The pound approached the highest level in nine months against the dollar on speculation the Bank of England will refrain from joining the Federal Reserve in renewed asset purchases this week...“In the wake of the GDP report last week, people have had a reassessment of the prospect for QE this week pushing up sterling against the dollar and the euro,” said Jeremy Stretch, head of foreign-exchange strategy at CIBC World Markets in London. “That leaves the pound vulnerable to a surprise.”
And lastly, Britain's sovereign credit ratings from S&P have improved since it's no longer on the watch list for a downgrade:
Credit ratings agency Standard & Poor's lifted its outlook for Britain's triple-A sovereign debt to 'stable' from 'negative' on Tuesday in a vote of confidence for the government's fiscal austerity programme. "The decisions reached by the United Kingdom coalition government ... reduce risks to the government's implementation of its June 2010 fiscal consolidation programme," S&P said in a statement.
Read my lips you slow-witted, wussy Americans of all persuasions: To improve your fiscal situation, you must both c-u-t public spending and i-n-c-r-e-a-s-e revenue collection. Bid 500,000 redundant public sector jobs goodbye. Scrap child benefits for high earners. Make tuition fees reflect the true cost of higher education. But, most of all, don't be such *%^damn wusses. In today's world economy, we all know where the wimps are. Tea Party primitives afraid of raising taxes certainly don't get a free pass. Grow some balls, fer cryin' out loud.