Britain heralds an age of austerity in Western world

It is following a path already trodden by Japan, Greece and Ireland, all of which have had to cut public spending and reduce indebtedness.

The governments of some of the world's biggest economies are taking the knife to public spending in a new wave of austerity measures designed to reduce their crippling levels of debt. The British are the latest to signal a new age of austerity in their fiscal policy, in an emergency budget announced yesterday that included severe cuts in public-sector spending and increases in consumer taxes.

But they are following a path already trodden by Japan, Greece and Ireland, all of which have had to cut public spending and reduce levels of public indebtedness. Even Germany, the healthiest economy in Europe, has announced plans for an "austerity package" to reduce government borrowings. But policymakers face a dilemma in their efforts to reduce debt: as governments in Europe and Japan account for a larger chunk of economic activity via pubic spending, will the cuts now being widely implemented lead to a slowdown in economic growth and stall the recovery?

It has become a bone of contention between the US and European governments, with Barack Obama, the US president, warning earlier this month that the world should "learn from the consequential mistakes of the past, when stimulus was withdrawn too quickly and resulted in renewed economic hardship and recession". The authorities in debt-laden Europe feel they have no choice. "The years of debt and spending make this unavoidable," was how George Osborne, the British chancellor of the exchequer, unveiled what he called the "tough but fair" budget.

Are such measures likely to be adopted by regional economies? Perhaps not yet, say economists. "You should not expect similar measures taken here," said John Sfakianakis, the chief economist of Banque Saudi Fransi. "If anything, it is the opposite as all GCC economies have expansionary budgets this year and will most likely maintain their expenditure if oil prices average at US$70 [a barrel]." The British measures will cut the budgets of most government departments, with the exception of the national health service and overseas aid, by 25 per cent over the next five years. An increase in value-added tax from 17.5 per cent to 20 per cent will also help get the public books back in balance, while public-sector pay will be frozen for those earning above £20,000 (Dh108,840) a year for the next two years.

The aim is to reduce the UK's deficit from its current level of £149 billion, or 10 per cent of GDP, to about 1.1 per cent, or £20bn, by 2014 to 2015. British debt levels are the second-worst in Europe after the Republic of Ireland's, where draconian financial cutbacks were imposed earlier this year. The destabilising effect of the new austerity measures was seen dramatically in Greece with violent outbreaks of civil unrest that left at least four people dead, while Italy and Spain have also been hit by demonstrations of public anger at new financial stringency.

In export-driven Germany, Europe's most successful economy and the fourth biggest in the world, the government has already imposed ?30bn (Dh135.34bn) of public cuts and is considering a further ?50bn. Even financially conservative Germans are feeling the keen edge of the new age of austerity. Japan too, after almost two decades of economic inertia, is having to come to terms with its debt mountain. Gross state debt has soared to 200 per cent of GDP and the Tokyo government is looking to limit the issuance of new bonds in an effort to balance the national budget by 2020.

* with reporting by Tom Arnold [e-mail]